What is recurring revenue?

Recurring revenue is money earned or paid out at regular intervals with a high degree of certainty, as in the subscription model.

For the company belonging to this model, the recurrence of cash flows brings operational and financial stability , facilitating the long-term vision and allowing a good projection capacity.

What types of businesses have recurring revenues?

Recurring revenue is derived from the sale of products or services with a constant need or regular use.

For example, many SaaS companies, offering software on a subscription basis, fall under this model. 

This is more broadly the case for all subscription-based players (media, telecoms, streaming platforms, electricity and water companies, etc.). Similarly, any company selling the same products on a regular basis benefits from recurring revenues.

What is MRS?

The term MRR(Monthly Recurring Revenue) is the monthly recurring revenue. It is the monthly recurring revenue, calculated according to the use of the service by the customers and what they pay over a month. This indicator thus measures the total recurring revenue normalized into a monthly amount.

The MRO is not the total revenue the company receives at the end of a month. Rather, it is the regular payments received each month, not including other one-time revenues. 

What is the RRA?

ARR(Annual Recurring Revenue) is the annual recurring revenue. This indicator calculates the value of recurring revenue, normalized over a one-year period.

This is the alternative standardization method to MRO. It is less frequently used but still relevant, and is often used by B2B SaaS companies with fixed-term subscription contracts.

How to calculate the MRR to evaluate its recurring revenue?

The MRR can be calculated using two different methods.

Method of calculating MRR 1 

To calculate the MRS using the first method, all the amounts paid by clients are added together. In this case, the MRS is calculated as follows:

MRR = Sum of monthly recurring amounts received.

For example, if 50 customers pay a monthly subscription of €100 and another 25 pay another plan for €75 per month, the MRO is (50 x 100) + (25 x 75) = €6,875.

Method of calculating MRR 2

To calculate the MRR with the second method, the average revenue generated by each client each month is multiplied by the number of clients. In this case, the MRR is calculated as follows:

ARM = Average recurring revenue per customer x Number of customers.

For example, the previous 75 customers pay an average of €91.67 to purchase a subscription. With this calculation method the MRR is 91.67 x 75 = 6,875 €.

As the company develops, certain factors can play a major role in the evolution of recurring revenue. The MRR can then be corrected by elements such as :

  • The monthly recurring revenue brought in by new customers over a given period of time: this is called New MRR.
  • Revenue generated by existing customers who have signed up for a more premium offer or new options: this is called MRO Expansion.
  • Revenues generated by reactivated subscriptions: this is called MRR Reactivation.
  • The loss of income resulting from the purchase of a less expensive offer: this is called MRR Contraction.
  • The loss of revenue caused by unsubscribes: this is called Churn.

To get a better view of the adjusted RRM based on the factors detailed above, the new net RRM should then be calculated using the following formula:

Net New MRR = (New MRR + Expansion MRR + Reactivation MRR) - (Contraction MRR + Churn).

How do you calculate the ARR to evaluate your recurring income?

There are also two ways to calculate the ARR.

Method of calculation of ARR 1 

The easiest way is to multiply the MRR by 12

ARR = MRR x 12

ARR 2 calculation method 

To calculate ARR using Method 2, add the cash flow generated by annual subscriptions to all other recurring revenues, and then subtract losses due to churn.

ARR = Annual subscription revenue + Other recurring revenue - Losses due to de-registration

What are the benefits of recurring revenue?

Recurring revenues = good projection capacity

Recurring revenues offer companies a lot of visibility and a good projection capacity . This business model also allows to contain the customer acquisition cost by amortizing it over time. 

Other costs such as those related to loyalty, collection and even certain administrative costs (e.g. billing) are reduced. 

Recurring revenue = prediction of activity flows

If the company based on this model markets physical products, it can, thanks to the recurring revenue model, more easily predict its activity flows and optimize its Supply Chain. 

With good visibility, it can achieve logistics cost reductions, better manage deliveries and better manage its inventory. No large working capital requirements to worry about!

Recurring revenues = investor confidence 

Investors and partners tend to trust more easily companies based on the recurring revenue model because their business model is often less risky and allows to improve productivity. 

Indeed, the visibility and stability offered by recurring revenues allow entrepreneurs to really focus on their core business without worrying about re-subscribing customers to a new offer and investing in expensive loyalty programs. 

Administrative processes such as invoicing can be automated, allowing teams to focus on customer satisfaction and the development of services and products.

What are the disadvantages of recurring revenue?

Recurring revenues = a significant investment cost

The main issue related to recurring revenues is often reaching a critical mass of subscribers, members or customers with recurring payments to reach the break-even point. 

This situation illustrates the fact that to be able to operate with this business model, the company must face a significant investment cost , an often high barrier to entry.

Recurring revenue = churn rate difficult to manage

However, if customers commit monthly, it remains complicated to have a real visibility on the long term, both in terms of customer portfolio and recurring revenues. It can indeed be difficult to manage the churn rate(the indicator of customer or subscriber loss) and the slightest misstep can undermine your performance.

Recurring revenue = promotional offers

On the other hand, if customers are yearly subscribers, the annual rates offered are usually slightly lower. 

This discount, which encourages customers to accept a long-term commitment, reduces the profitability of the company offering the service. However, one should not forget the financial income generated by the cash received in advance. Finally, if changes are made to the service during the year, it is not possible to pass this on to the tariff.

Why is FBR key for companies with recurring revenues?

RBF or Revenue Based Financing is financing based on the recurring and future revenues of companies based on this model. It is a non-dilutive type of financing (there is no transfer of capital in exchange) where investors provide cash in exchange for a certain percentage of the company's future gross revenues.

It is an alternative investment to more conventional investments such as venture capital and business angel investment ordebt. RBF is more flexible than these options because repayment is based on your sales.

It has many advantages. In particular, it is fast to set up (less than 48 hours at Karmen), non-dilutive and transparent. These are the three principles of this solution that allows companies to advance their recurring revenues. 

Thus, the recurring revenue model allows companies to reduce costs, to have a better projection capacity and to really focus on improving their products and services. While companies based on this model often have to invest significant amounts to obtain a critical mass of customers, they can count on an innovative, non-dilutive and fast financing alternative, the RBF.

Karmen is a revenue-based financing solution for digital and recurring revenue companies looking for short-term financing.

In less than 48 hours, Karmen can release funds to finance projects, customer acquisition costs or generate cash. 

In addition to this speed of execution, revenue-based financing is a non-dilutive and more accessible financing solution.

‍Karmen finances digital businesses, including those with recurring revenues, up to 40% of their ARR. We support you over the long term, with a tranche of financing to be repaid monthly over a repayment period of 4 to 12 months. What's more, we don't require a personal guarantee.