There has been a rise in the number of organizations that have started implementing recurring revenue & subscription model. Is it offering better benefits compared to traditional business models? Let’s explore this business model in detail.
There is a business truth that most Organizations alike tend to overlook – “not all revenue is created equal”. But the more foreseeable revenue, the more likely that you will earn that revenue from your customers every month, the more valuable it becomes. When you begin to multiply your revenue by adding new customers and you begin receiving the benefits of what is known as Recurring Revenue (RR).
What is Recurring Revenue? – The part of a company’s revenue that is most likely to continue in the future. This is revenue that is foreseeable, stable and can be counted on in the future with a high degree of certainty. Recurring billing model can accommodate nearly any pricing model that one can think of. Subscription model, one-time usage, subscription-plus-usage model or any other structure. It doesn’t matter how often business models change. It doesn’t matter what the scale or complexity is. It’s all easily done. And that can only be good for business, right?
Recurring revenue helps firms to grow rapidly compared to traditional business model. Once a firm reaches certain level of recurring revenue, it can concentrate on increasing the revenue instead of looking for same level of revenue in the subsequent years. Take for an example a business with $100 million in turnover, with 90 percent of it is recurring. This business can be certain that it will receive $90 million revenue in next fiscal year as well. It only has to concentrate on the remaining 10 million revenue generation by adding new customers to reach the $100 million target level. Firms which follow non-recurring or traditional business model have to start with $0 revenue every fiscal making it tougher for the organization to sustain in the market for a longer term.
By following recurring revenue model, firms can estimate what they are going to earn and at the same time face less risk compared to firms which follows traditional business model. If a company has more recurring revenue then it receives higher valuation in the market. This is one of the major reasons for companies to consider adopting a recurring revenue model.
To understand clearly, let’s compare AT & T postpaid and pre-paid business models to see the power of this idea. In postpaid, customer is bound to the carrier due to contract and company receives fixed revenue monthly. As it is beneficial for the customer and AT & T, it encourages customer to opt for the postpaid subscription instead of prepaid. Another well-known classic example is Netflix and Blockbuster’s models. Netflix provides recurring service for a reasonable price as opposed to blockbuster’s model of one time purchase transaction. Netflix is very successful by following this model.
Recurring Revenue comes in three different flavours:
• Subscription: Fixed payment for a specific period of time like Day, Month, Quarter, and Half-Year & Year.
• Usage: Charges per use or per unit of service
• Subscription plus usage: Combines fixed subscription service level with “Overage” billed as additional charges.
Organizations will benefit from the following Recurring Revenue & Subscription Analytics.
1. Monthly Recurring Revenue: Is a measure of the foreseeable (or predictable) and recurring revenue components of your subscription business. It will typically exclude one-time and variable fees, but for month-to-month businesses could include such items
2. Revenue Recognition: Generally, revenue is recognized only when a specific crucial event has occurred and the amount of revenue is measurable. For most businesses, income is recognized as revenue whenever the company delivers or performs its product or service and receives payment for it then it’s called earned revenue. However, there are several situations in which exceptions may apply. For example, if a company’s business has a very high rate of product returns, revenue should only be recognized after the return period expires.
3. Deferred revenue: is a balance sheet liability account. Company liable to the customer for the portion of amount which he already paid. Deferred revenue is equal to the value of invoices to date over the recognizable revenue to date calculated by customer contract and then aggregated and reported in summary form. Because deferred revenue is a balance sheet item, it is always calculated at a point in time.
4. Cohort analysis: Is one that groups customers based on their “Join/Start date,” or the date when they made their first purchase. Analyzing the spending trends of cohorts from different periods in time can indicate if the quality of the average customer being acquired is increasing or decreasing in over time.
5. Churn out customers: Disconnected or Moved out Customers from the client
6. New Customers: Newly added customers to the client
7. Retention Rate: keeping the customers who were so expensive to acquire
8. Usage Analysis: Usage analysis by Usage types and Plans
It is a known fact that recurring revenue and subscription model has played a big part in tremendous growth across industry verticals like software, IT services, telecom, agriculture, real estate, manufacturing, construction, professional services…the list goes on .It helps organizations to survive long term in the market.
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