Recurring revenue: what it is, how it works, advantages and which indicators to use   

Recurring revenue: what it is, how it works, advantages and which indicators to use   

revenue

recurring revenue

What do you know about what recurring revenue is and how it could be used by your business?

The most traditional way of selling is to carry out one-time transactions. In other words, the customer goes to the store, buys what he needs and then leaves. It may come back to buy again or not. And, each time a sale is made, it demands new efforts from the team.

Therefore, in order to maintain a more stable billing level and with less use of resources, many companies started to bet on the recurring billing model.

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This alternative has been gaining more and more followers. So much so that only in Brazil between 2014 and 2018, there was a growth of 167% in the business market with recurring revenue. The data are from the Brazilian Association of Electronic Commerce (Bascom).

But the report Payments American Market Recurring 2017-2021 predicts that by the end of 2021, commercial transactions via recurring payment will reach R $ 1.8 billion mark.

If you are interested in implementing the recurring revenue model in your company and would like to learn more about this subject, rest assured that we will explain everything you need to know.

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In the next lines of this article, you will check what is recurring revenue, which indicators to monitor and the advantages that this model offers:

  • Revenue predictability;
  • Decrease in default;
  • Increased customer retention;
  • Reduction in Customer Acquisition Cost.

In addition, we’ll also show you some examples of businesses with recurring revenue for you to be inspired by.

What is a recurring revenue business model?

We can define what is recurring revenue as a modality in which the customer makes payment at a previously agreed frequency in order to have access to products or services offered by the company with which he signed a contract.

Companies that operate under the monthly recurring revenue model, for example, receive a monthly amount of money from their customers and provide them with access to a certain service or product during the current month.

The charge is usually made automatically via credit card, direct debit or bank slip. If payment is not made, access is interrupted until everything returns to normal.

Instead of having to repeat the purchase procedure every time they want to purchase the product or service, the customer provides their data only once and every month (or other frequency agreed between the parties) will be charged for access, generating revenue applicant for the company.

What are the advantages of adopting the monthly recurring revenue model?

Implementing the monthly recurring revenue model can bring a number of benefits to your company. Below are some reasons to adopt this modality in your business model.

1 – Revenue predictability

By adhering to the recurring revenue model, it is possible to have greater predictability about how much the company will bill monthly, semiannually and annually.

With this, it is possible to better plan investments and have more effective financial control.

With a dashboard detailing your metrics it’s easier to make sales forecasts, see how the Agent can help you by watching this video:

2 – Decrease in default

Recurring collection is made automatically, by the payment method chosen in the contract. Therefore, if the customer does not pay, he will not have access to the product or service that he has purchased.

This tends to reduce delinquency and also the resources invested in collecting overdue invoices.

3 – Increased customer retention

Businesses with recurring revenue are able to retain their customers for longer, as the purchase cycle does not have to repeat itself every time they want to purchase your products and services.

In other words, situations in which the repurchase is postponed for some reason are avoided.

4 – Customer Acquisition Cost Reduction

The monthly recurring revenue model allows the company to reduce its costs for acquiring new customers. But why?

Because the model is based on sales plans, whose advantages and differentials have already been tested and approved by several other customers. This makes it much easier to show new customers that hundreds (or thousands) of people already use the service and feel satisfied with it.

Performance indicators for recurring revenue

To ensure the good performance of your business in the recurring revenue model, it is important to monitor some key indicators. Are they:

  • Average ticket: amount spent on average by customers for each purchase;
  • Recurring Monthly Billing (MRR): recurring amounts that the company receives each month, with the sum of all active customers;
  • Recurring Annual Billing: the total amount of all recurring receipts during one year;
  • Customer Acquisition Cost (CAC): all amounts spent to acquire new customers, by marketing and sales, divided by the number of customers acquired in the period;
  • Customer Lifetime Value (CLTV): the average value a customer leaves for the company during their relationship with it;
  • Churn Rate: The number of customers lost by the company during a period, divided by the number of customers at the beginning of that period.

And if you want more sales indicator tips, we have a few more for you:

Businesses with recurring revenue: 3 B2B examples to get inspired

Several companies have obtained good results in the recurring revenue model, however, we often only know the success stories of B2C models – such as subscription clubs for books, wines, toys, records, among other products that arrive at our homes monthly.

However, there are many inspiring and even business reinvention models in B2B. Let’s meet some of them?

Scheduler – CRM Software

The Agendor is a Software as a Service (Saabs) model, or, translated into Portuguese, software as a service.

What does this mean in practice? That instead of a company buying a CRM system and installing it on salespeople’s machines, it contracts it as a service, in a subscription and cloud access model. As a result, in addition to always having the software up-to-date, access to technology is more agile and economical.

Darrius – Information Security and Cyber Security Consultancy

It’s not just technology that can be hired in a subscription model in B2B. Consulting companies like Darrius already have specialized outsourcing service models for monthly bundles of hours for their clients. Thus, instead of carrying out specific projects, there is also recurring revenue through a package of hours for companies that do not have internal teams in these areas.

Simpers – Equipment outsourcing platform

Simpers has a business model based on outsourcing of MFPs, printers, tablets, smartphones, notebooks and desktops. In this way, its customers hire the equipment without generating internal assets and facilitating maintenance and the process of switching to new technologies.

Can your business have a recurring model?

In these examples, we saw that recurring revenue does not have to be a company’s only revenue model, and that it is possible to offer subscription services and products in different markets. Does your company have any opportunity in this regard? Or is it possible to start a new business with this profile?

If the answer is yes, remember to do a good market study and a thorough business plan to take advantage of the opportunities and also surf the recurring revenue trend. After all, this market tends to grow more and more!