Maintaining a steady income when you launch a business can be quite challenging. That’s because it takes a long while for a company to build up a client base.
Although, that’s not the case for all businesses. Some ventures have a stable structure that makes predicting future revenue a cakewalk.
These will be able to generate consistent profit without additional work. So, if you’re worried about income, you may want to opt for recurring revenue businesses.
In this article, we’ll walk you through everything you need to know about these ventures. We’ll also cover some examples of recurring revenue businesses.
- What Are Recurring Revenue Businesses?
- Why Is Recurring Revenue So Good?
- What Are the Types of Monthly Recurring Revenue?
- How Are Recurring Revenue Businesses Valued?
- Recurring Revenue Business Ideas
- Recurring Revenue Business Models
- How Do You Create a Recurring Revenue Business?
- What Are Examples of Recurring Revenue?
- Wrapping Up
What Are Recurring Revenue Businesses?
A recurring revenue business is one that’s able to generate a stable income over a prolonged period. It does that by selling a product or service that requires a regular recurring payment.
Typically, these come in the form of monthly or annual subscriptions. An example of that is a gym membership.
At the beginning of each month, you’ll need to pay a renewal fee to keep using the workout space.
This allows businesses to calculate their potential revenue and expenses throughout the year.
To do this, the company will have to build strong connections with its clients. This becomes possible by offering promotions or discounts, and excellent customer service.
Why Is Recurring Revenue So Good?
Now that you understand what a recurring revenue business is, we can jump into the advantages. In this section, we’ll cover why launching this type of venture is a good idea.
1. Helps Predict Cash Flow
One of the toughest aspects of launching a new business is predicting cash flow. For the first few months, it can be challenging to figure out how much income you’ll bring in.
Thankfully, that’s not the case with recurring revenue businesses. With this structure, your venture will have a steady stream of earnings, in the form of passive income.
This will help you figure out your budget and investments. Because of that, you’ll be able to predict future cash flow and plan accordingly.
2. Gets Regular Income
There are many expenses that go into running a business. That includes operational costs such as salaries and office rentals.
These can be a little tough to keep up with directly after launching. Fortunately, a recurring revenue stream structure can help with that.
With this business type, your venture should pull in regular income. With that, you’ll be able to pay off your expenses and keep the lights on every month.
On top of this, with enough planning, it’s possible that you can generate free cash flow. This will make running your business much less stressful.
3. Easier to Scale
With a predictable cash flow, planning out your expenses should be a walk in the park. Because of that, you’ll be able to generate profits in a short period.
That should give your business a bit of stability. This, in turn, gives you an excellent foundation to grow your venture.
Since you’ll cover the basic expenses, you can focus on expanding your company. You may do that through promotions or experimenting with new products and services.
Other than that, with stable recurring revenue, attracting investors should be a breeze. You’ll be able to show them projections of your predicted income.
That should help you grow your capital in no time. This extra investment will make expanding the business much easier.
4. Builds Long-Term Customer Relationships
There are many benefits of running a recurring revenue business. Although, the most important is that it helps build strong ties with customers.
After months of using your service, clients will come to depend on it. They grow accustomed to your product and they develop loyalty to your business.
This means they’re less likely to jump ship and find another service provider.
Plus, with recurring customers, you can always ask for feedback. That way, you can improve your products and make your clients happy in one fell swoop.
What Are the Types of Monthly Recurring Revenue?
With the basics out of the way, we can look at the types of monthly recurring revenue (MRR). Here’s a quick look at the different varieties.
1. New MRR
As the name suggests, this type of model relies on MRR from new customers. To calculate this figure, you multiply the number of new clients by the subscription fee.
For example, if you acquire 10 customers and the membership costs $20, then the MRR is $200.
This represents your earning capacity. With that number, you’ll be able to calculate your potential for growth and stability.
2. Expansion MRR
Expansion MRR focuses on the income that an existing customer generates. This can give you an idea of how well your business is performing.
There are a few types of expansion MRR. First up, we have the Add-on variety. That’s when a client purchases new services that aren’t part of their current subscription.
An example of this is when a gym member signs up for an extra class.
Moving on, the second type is the upsell expansion MRR. This happens when a recurring customer upgrades their subscription.
Think of when a free trial ends and the client signs up for the paid version of the service.
Other than that, there’s the cross-sells MRR. With this variety, consumers pay for the non-core products that you offer.
For instance, when a customer buys a beverage at the gym.
The expansion MRR can help you gauge customer loyalty. This is crucial if you’re planning to expand your business in the near future.
3. Churned MRR
Not all MRRs calculate profits. This variety represents the recurring revenue a business loses due to customer decisions
There are a few contributors to this figure. For starters, subscription service downgrades play a major role.
When a customer opts for a more affordable version of your service, then you’ll lose a bit of revenue.
Yet, this isn’t the worst culprit. Client cancellations make up the majority of churn MRR.
Another factor that comes into play is delinquent payments. This is when a consumer doesn’t pay for their subscriptions on time.
To ensure churn MRR stays at a minimum, it’s a good idea to increase the number of active clients. Plus, you can try adjusting your pricing scheme.
This is an important metric if you’re selling software as a service.
4. Reactivation MRR
Reactivation MRR is income earned from previously canceled subscriptions. In simpler terms, that happens when a customer you lost re-signs up for your services.
This is usually a positive sign for a business owner. It means that a decision they made in the recent past has reignited client interest in your company.
That’s why this metric can be incredibly useful if you’re trying to improve customer retention.
There are a few ways to attract clients that already left your business. These include promotions and discounts.
Although, it’s best not to devalue your services too much when trying to win back customers. Otherwise, you’ll negatively impact your churned MRR.
5. Contraction MRR
When a business holds clearance sales or heavy discounts, it’s bound to lose some income. We call this metric the contraction MRR.
This is similar to the churned MRR since they both calculate losses. However, contraction MRR is usually due to company decisions rather than client habits.
Generally, it’s best to keep this number as low as possible. Although, discounts can attract new clients and increase customer loyalty.
The contraction MRR can help you identify issues with your service pricing. If you notice that you get a huge influx of new clients after a discount, then your products may be a bit expensive.
How Are Recurring Revenue Businesses Valued?
There are a few different ways to value a company. The method you choose will depend on the consistency of your income.
If you generate stable recurring revenue, then capitalization of cash flow is the way to go. That’s because this valuation assumes your business will grow at a steady rate.
Capitalization sounds like a complicated term, but the meaning is quite simple. It refers to when you convert an income stream into a valuable resource that you can utilize.
To use this valuation method, you’ll need to calculate your capitalization rate. This is the net income divided by the current market value of your business.
Typically, for a privately owned company, the rate will be around 10% to 30%
Then, you can divide your income by the capitalization rate. This will give you a rough estimate of the value of your business.
Recurring Revenue Business Ideas
There are countless types of recurring revenue businesses. This may make deciding on a venture a bit of a challenge.
So, to make your life a bit easier, here are a few ideas for passive income to get you started.
1. Membership Program
A membership is a long term contract that you enter with your clients. Customers will sign up for ongoing access to your business.
They’ll have to pay a monthly fee to keep using your services. Although, consumers are free to cancel their subscriptions at any time for no extra cost.
The easiest way to keep this recurring revenue running is through customer relations. Be sure to listen to what your clients are looking for.
That way, you can tailor your services to their specific needs.
2. Product Subscriptions
An excellent recurring revenue business model idea is product subscriptions. Clients will pay a monthly fee to receive your products regularly.
Some customers will buy the same products over and over. These include items like shampoo, razors, or kitchen consumables.
So, instead of going online to purchase the item, they’ll join product subscriptions. That way, they don’t have to worry about placing new orders every month.
As long as the client is happy with your products, they’ll continue to generate recurring revenue.
A SaaS business stands for Software as a Service. With this model, you’ll sell an online product instead of a physical one.
Customers will pay a monthly subscription to maintain access to your software. This will generate a steady income that you can use to improve your services.
Plus, with this type of model, there’s no large upfront cost to the clients. Because of that, finding new customers shouldn’t be a tough task.
One of the best parts about this recurring revenue source is that it’s virtual. As we all know online businesses require little overhead expenses.
That means you’ll be able to keep costs low and maximize your profitability.
4. Retainer Plans
Retainer recurring revenue models are similar to work-for-hire contracts. This plan is particularly useful for service-based businesses.
To help you understand this, let’s take a look at an example.
Company websites are a crucial part of running any successful business. So, many firms rely on web designers to create their online profiles.
The designer will charge a fee to create the website. Although, that’s not where their duties end.
All online pages need maintenance from time to time. For that reason, the designer can charge a monthly subscription.
They’ll monitor your page and ensure that everything is running smoothly for a fee.
5. Online Courses
People are always looking for new ways to increase their income. One of the fastest ways to do that is by taking courses in their respective fields.
That means there’s no shortage of customers looking for new classes to join.
This is an amazing way to capitalize on recurring revenue. Instead of paying for one class at a time, clients can sign up for a monthly course.
Your service will provide access to information that’s valuable to your customers. So, as long as they keep learning, you can continue to generate income.
Recurring Revenue Business Models
There are a few models you can implement when it comes to recurring revenue business. In this section, we’ll go over some of the most notable ones.
In this model, companies provide customers with a particular service. Usually, this happens over a specific period, with predetermined charges.
A great example of this is a mobile phone subscription. When a new client signs on, they’ll agree to a price in exchange for certain services.
That includes being able to make calls and send messages for an entire month.
The main difference between contacts and membership programs is the termination. With the former, clients have to stay with your business until the contract period ends.
Otherwise, they may have to pay a substantial cancellation fee.
Sunk Money Consumables
For this model, the client makes an initial investment in one of your products. Then, to continue using the item, they’ll need to pay for consumables.
This is clear when you look at home coffee makers. Customers have to buy the device at a cost.
Then, to use it, they need to purchase additional capsules. Without them, the coffee maker can’t perform its function.
So, to continue to use the device, clients will need to regularly buy more of your products. This will leave you with a nice, steady stream of income.
As you can guess by the name, this model relies on renewed subscriptions. These memberships will continue until the client voluntarily cancels them.
For example, when you sign up for a magazine subscription, you’ll get a copy every month. Then, the publisher will deduct the cost of their services from your bank account.
Since they can go on indefinitely, we refer to them as evergreen subscriptions.
With this recurring revenue model, clients can sign up for different service tiers. Each one will come with a set of benefits and costs.
Once the consumer exceeds their allowance, the service will stop. They can also opt to move to a higher tier with more functionality and units of usage.
That allows them to charge different rates based on the products the clients are looking for.
How Do You Create a Recurring Revenue Business?
If you’re interested in starting your own recurring revenue business, then we’ve got you covered. In this section, we’ll look at what it’s going to take to create the company.
1. Come Up With an Idea
The first thing you’ll want to do is come up with an idea for your business. Unfortunately, this part of the process can be a bit tedious and time-consuming.
To start, figure out what service you’d enjoy providing. Then, examine the market and your competition to figure out what you can bring to the table.
You don’t have to reinvent the wheel for this section. All you need to do is come up with an innovative spin on a pre-existing service.
2. Choose a Model
With your idea in mind, you can move on to selecting a recurring revenue model. These include contracts, sunk money consumables, and auto-renewals.
Spend a little time researching each model and its benefits and drawbacks. Then, decide which one works best with the service that you want to provide.
The easiest way to make a decision is to look at your competition. Figure out what they’re doing right and wrong with their business model.
This will allow you to avoid common pitfalls.
3. Come Up With a Strategy
Choosing a model will give you a great launching point for your business. It’ll help you come up with a strategy to start the venture.
At this stage, you’re ready to think of your pricing scheme. To do that, calculate your operational expenses and the cost of providing the service.
Doing so should give you a rough idea of how much you can charge.
This is also a good time to think about billing systems. It’s the method you’ll use to charge customers for your service.
4. Create a Business Plan
With all the previous information in mind, you can move on to creating a business plan. This is a document that outlines your strategy and company structure.
There are a few benefits to preparing this plan. First off, it’ll give you a clear guideline on how to run your business.
Other than that, it can help attract investors later on. With a clear plan, it’ll be easy to convince an outsider that your venture has the potential to be lucrative.
To help you out, here are a few business plan examples.
5. Implement the Plan
Now that you have a plan in hand, you can implement it. This is when you’ll start contacting vendors and suppliers for materials.
Plus, you’ll need to find an office for your business and begin hiring staff.
What Are Examples of Recurring Revenue?
There are countless examples of recurring revenue companies. Here’s a quick round-up to make your life a little simpler.
Plus, we’ll also dive into the businesses that generate high recurring income.
Examples of Recurring Revenue Businesses
- Netflix: Customers have to pay a monthly fee to get access to the platform.
- Gym: Clients have to pay a subscription fee to use equipment and the workout space.
Companies With High Recurring Revenue
- Adobe: Clients have to pay for upgrades to software. That means the business will generate continuous income for the same product. OKTA: IT specialists charge a retainer to maintain your computer systems.
You can also check out this list of the best businesses to buy. This should help you make a decision about where to invest your money.
Recurring revenue businesses are an excellent way to generate passive income. These companies should be able to pull in steady revenue over a prolonged period.
There are many benefits to this type of business structure. For starters, it helps predict cash flow and get regular income.
Other than that, it’s easier to scale and build long-term relationships with customers.
Moving on, we have five main types of monthly recurring revenue. These include new, expansion, churn, reactivation, and contraction MRR.
Finally, there are a few different models of recurring revenue. Those are contracts, sunk money consumables, auto-renewals, and payment tiers.
If you have any more questions about recurring revenue businesses, be sure to leave us a comment.