Recurring Revenue - Explained
What is Recurring Revenue?
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Table of ContentsWhat is Recurring Revenue?How is Recurring Revenue Used?Examples of recurring revenueLong-term contractsAuto-renewing subscriptionsCross-selling supplementary goodsBig brands with loyal customer basesSpecial considerations
What is Recurring Revenue?
Recurring revenue refers to the specific percentage of an organizations revenue that persists in the coming years. Contrary to one-off sales, recurring revenues can be easily predicted, are consistent, and can be predicted to take place at specific time periods.
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How is Recurring Revenue Used?
Organizations, business analysts, investors, etc. have a huge interest in the organizations revenue that is displayed on the income statement. These revenues also referred to as top line, ascertain the bottom line that are the company's profits. For arriving at net income, the company's expenses and taxes need to be subtracted from its revenues. Revenue can be a result of either one-time sales or sales made on a continuous basis at specific intervals of time, which is also called recurring revenue. This type of revenue plays a huge role for an organization that needs to have a consistent flow of revenue. Key takeaways
- Revenue comprises of sales that are made once or a steady flow of expected timely sales, referred to as recurring revenue.
- Recurring revenue can take place in several forms in different sectors.
- Recurring revenue is said to be premium quality for an organization to have.
- However, there is no surety that recurring revenues will last for an indefinite period of time.
Examples of recurring revenue
Recurring revenue can be seen in several forms in different industries. Examples include financial institutions receiving payments every month from clients as part of long-term agreements, big companies that expect to receive a continuous income from their products, predicting that they will keep being customers top choice for the coming years.
There are many sectors that bind their customers in long-term contracts for using a specific product or service. For instance, cell phone companies ask customers to be a part of their 2, 3, or 4-year contracts and pay on a monthly basis for using their network or cell phone services. These organizations consider these future revenues as they are sure that customers will make monthly payments until the contract expires.
Policies that renew automatically, also known as evergreen subscriptions, include MS Office 365, McAfee anti-virus policies, music subscription services, online publications, etc. These are referred to as recurring revenue for the company. Organizations can be assured of receiving payments until the customer terminates the contract. One can calculate monthly recurring revenue by multiplying the number of paying customers with the average revenue earned per customer.
Cross-selling supplementary goods
Organizations that offer products that can only work only by using accessories manufactured by the same company can also predict having prospective revenues. For instance, a shaving blade that only works with personalized razors, a toilet bowl brush stick used only with particular scrubbers, a private coffee maker that accepts a specific type of cups, and will always need refills, will comprise recurring revenues for firms.
Big brands with loyal customer bases
Organizations that are well established in the market, and have loyal customers who keep buying products again and again also experience recurring revenues. For instance, Coca-Cola Co. The soft drinks produced by companies are consumed by people throughout the world several times on a daily basis. For many years, people have bought its products so much that Coca-Cola can reasonably predict the number of bottles it will sell in the coming years.
There are many market researchers who consider recurring revenue as a premium desirable quality. They ensure stability and predictability in operational and financial manner, reducing the risk that firm will make dramatic changes from one month to another. But this type of consistency comes at an expense. Companies that ensure recurring revenues attract more investors as they are fine with investing in a company that shows stable earnings, and hence better yields. In the same manner, if sales patterns are diminishing, it can be a matter of worry. Agreements don't sustain for the entire lifetime. There can be times when company's fortune takes a U-turn, and favors it no longer. After all, consumer preferences keep changing with time, and the competition keeps getting stronger.