Recurring revenue: Why it matters and how to boost it

Our guide will explore the ins and outs of recurring revenue to help give you sustainable growth. We'll cover everything from its definition and importance to the various models for boosting its potential.

You'll also learn:

• How to calculate your recurring revenue using different formulas
• The different types of recurring revenue models
• Key factors to consider when choosing the ideal recurring revenue model
• How Orb can help you optimize your revenue strategy

Let’s begin by explaining what recurring revenue is and why it’s so important for SaaS businesses.

What is recurring revenue, and why does it matter?

Recurring revenue is a company's revenue that is expected to continue in the future. This consistent revenue comes from sources such as subscriptions, contracts, and memberships.

Why is it so important then?

Recurring revenue provides a stable foundation for your business, allowing you to plan for the future with confidence. It enables you to:

• Invest in growth: With a predictable revenue stream, you can allocate resources toward growing your business. Think product development, marketing, or hiring.
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• Weather economic uncertainty: Recurring revenue provides a buffer during tough economic times. It makes your business more resilient to market fluctuations.
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• Achieve long-term goals: A stable financial base allows you to focus on strategic initiatives. It also helps in working towards long-term objectives. You can increase market share or expand into new markets.

Compare recurring revenue models

To help you weigh your options, here's a brief overview of the pros and cons of each recurring revenue model:

What happens if your SaaS company doesn’t have recurring revenue?

Without recurring revenue, your business faces a number of challenges:

• Difficulty managing cash flow: Unpredictable revenue makes it difficult to manage expenses. In turn, ensuring you have enough funds to operate becomes even more challenging.
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• Inaccurate forecasting: Without a clear picture of future earnings, it's hard to predict future gains and make key decisions accordingly.
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• Limited growth potential: The lack of a stable financial footing can keep you from investing in growth opportunities. 

In SaaS — where customer relationships are often ongoing as opposed to one-time transactions — recurring revenue is even more critical. It provides a stable base upon which to build customer loyalty, improve your product, and ultimately, grow your business.

Benefits of recurring revenue

Recurring revenue is a catalyst for growth and long-term success in the SaaS. Here's a breakdown of the key benefits:

• Better predictability: Knowing what to expect each month allows for better financial planning. Predictability empowers you to make informed decisions about product investments, hiring, and product development. 
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• Increased customer lifetime value (LTV): Recurring revenue models often foster stronger customer relationships. When customers commit to ongoing subscriptions, they're more likely to become loyal advocates. Higher advocacy can mean a higher LTV.
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• Lower customer acquisition costs: Recurring revenue streams naturally encourage customer retention. Having these revenue streams reduces the pressure to constantly acquire new customers. It can also help lower customer acquisition costs (CAC) over time.
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• Better valuation: Companies with strong recurring revenue streams are often viewed as more stable. These businesses become more attractive to investors, potentially leading to higher valuations.
  
  
• Opportunities for upselling and cross-selling: By offering extra features or complementary products to your existing subscriber base, you can increase average revenue per user (ARPU) and drive further revenue growth.
  
  
• Data-driven insights: Recurring revenue models generate a wealth of valuable data. By looking at metrics like churn and engagement, you gain insights into customer behavior and preferences.
  
  
• Scalability: Recurring revenue provides a solid foundation for scaling your SaaS business. With a predictable income stream, you can invest in infrastructure, expand your team, and support a growing customer base.

How to calculate your recurring revenue

There's no one-size-fits-all formula for calculating your recurring revenue. Here are a couple of common approaches:

The basic formula

This formula focuses on the core components of recurring revenue:

Recurring revenue = number of paying users x Average Revenue Per User (ARPU)

Let's break it down:

• Number of paying users: This is the total number of customers actively paying for your service or product during a specific period.
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• Average Revenue Per User (ARPU): This is the average revenue generated per paying user within that same period.

For example: If you have 100 paying users and your ARPU is $50, your recurring revenue would be 100 x $50 = $5,000.

A more in-depth formula

This formula provides a more detailed view, accounting for factors that can impact your recurring revenue. It looks like this:

Recurring revenue = (new customer subscription revenue + existing customer subscription revenue + add-on and upgrade fees) - (churned customer revenue + downgrade fees)

Here's what each component represents:

• New customer subscription revenue: Revenue generated from new users who joined during the period
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• Existing customer subscription revenue: Revenue from existing customers who continue their subscriptions
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• Add-on and upgrade fees: Revenue from existing customers who buy add-ons or upgrade to higher-priced plans
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• Churned customer revenue: Revenue lost due to customers canceling their subscriptions
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• Downgrade fees: Revenue lost due to customers downgrading to lower-priced plans

For example: Let's say in a month you have $1,000 in new customer subscriptions, $4,000 in existing customer subscriptions, and $500 in add-on fees. However, you also had $200 in churned revenue and $100 in downgrade fees. 

Your recurring revenue for that month would be: ($1,000 + $4,000 + $500) - ($200 + $100) = $5,200. This formula provides a more accurate picture of your recurring revenue by considering customer churn, upgrades, and downgrades.

Types of recurring revenue models

When it comes to building a successful SaaS business, choosing the right recurring revenue model can make all the difference. Here's a look at some popular options:

1. Usage-based billing

In this model, customers are charged based on their actual usage of the product. This model offers a fair pricing structure that aligns with customer needs and encourages them to get the most out of your service.  

Why it works for SaaS:

• Scalability: This model allows your pricing to scale with your customers' needs, making it suitable for businesses of all sizes.  
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• Flexibility: Customers can adjust their usage and spending as needed. Offering them this level of agency can increase their satisfaction and loyalty.  
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• Lower barriers to entry: Lower upfront costs can attract customers who might hesitate to commit to a fixed subscription fee.  

2. Fixed contracts

Fixed contracts involve customers signing up for a specific service level at a set price for a predetermined period. This model provides a high degree of predictability for you and your customers.  

Why it works for SaaS:

• Stable revenue: Fixed contracts guarantee a steady stream of revenue for the duration of the contract.  
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• Customer commitment: This model encourages customers to engage with your service for a longer period. The consequence is an increase in their lifetime value.   
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• Simplified forecasting: Fixed contracts make it easier to predict future revenue and plan ahead.  

3. Service retainers

Service retainers are common in SaaS businesses that offer ongoing support. It's also usual in companies that offer consulting or maintenance services. Customers pay a recurring fee to access a certain level of service or expertise.  

Why it works for SaaS:

• Guaranteed revenue: This model provides a predictable revenue stream from ongoing service contracts.
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• Stronger customer relationships: Regular interactions foster closer relationships and build trust.  
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• Upselling opportunities: Retainers can open doors to upselling additional services or features.

4. Auto-renewing subscriptions

Customers subscribe to your service on a recurring basis with automatic renewals until they choose to cancel.  

Why it works for SaaS:

• Convenience: Auto-renewing subscriptions simplify the payment process for customers and ensure uninterrupted service.  
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• Customer retention: Automatic renewals encourage continued usage and reduce churn.  
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• Growth potential: This model provides a foundation for growth and predictable revenue streams.

5. Tiered subscriptions

Tiered subscriptions offer different levels of service or access at various price points. This type of recurring revenue model allows you to cater to a broader range of customers with varying needs and budgets.  

Why it works for SaaS:

• Customer choice: This model empowers customers to choose the plan that best fits their requirements and budget.  
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• Upselling potential: It provides a clear path for customers to upgrade to higher tiers as their needs evolve.
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• Increased revenue: Offering premium tiers with advanced features can boost your revenue potential.    

How to select which recurring revenue type is best for you

Choosing the right recurring revenue model for your SaaS business is a crucial decision. To help you make the right choice, consider these key factors:

Your target audience

It's essential to understand your ideal customers. Are they individuals, small businesses, or large enterprises? Consider their needs, budget constraints, and usage patterns. 

Startups with limited budgets might be drawn to a usage-based model or a tiered subscription plan with a low-cost entry point. Large enterprises might prefer the stability and predictability of fixed contracts.

Your product or service

The nature of your offering will influence the most appropriate pricing structure. Ask yourself: What are you offering? Is it a core software application, a supplementary tool, or an ongoing service like support or consulting? 

If your product has a wide range of features, tiered subscriptions allow customers to choose the level of access that best suits their needs. 

Your business goals

Align your revenue model with your overall business objectives. Are you focused on rapid growth, customer acquisition, or maximizing profitability? 

If rapid growth is your goal, a usage-based model can help attract a wider range of customers with its flexible pricing. If you're aiming for high profitability, fixed contracts or tiered subscriptions can help boost revenue.

Your resources and capabilities

Evaluate the resources you have available. Consider your team's capacity, your tech stack, and your ability to manage various billing structures. 

Usage-based billing may need more refined tracking and billing systems. Fixed contracts might require a dedicated team to manage contract negotiations and renewals.

Let Orb help you expand your billing options

Now, how do you bill users accurately with a recurring revenue model?

Orb is the tool that can elevate your billing strategy to new heights. Orb is a billing platform that provides businesses with the tools and insights to boost their recurring income. Whether you're a startup or an enterprise, Orb allows you to easily manage your billing processes.

Here's how Orb can improve your recurring revenue strategy:

• Accurate and transparent billing: Orb tracks every billable event. We ensure accurate and transparent invoices for your customers. Our platform helps you build trust and reduce billing disputes.
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• Adaptable pricing structures: Orb's plan versioning features let you create diverse pricing tiers. We enable you to evolve your pricing strategy as your business grows.
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• Decision-making based on data: Orb provides detailed financial reports. These reports give you valuable insights into your revenue streams and customer behavior. This data helps you to make better decisions about your pricing and customer success initiatives.
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• Seamless workflow integration: Orb integrates with popular data warehouses and accounting software. We help streamline your billing operations and lower the risk of errors.
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• Customized billing solutions: Orb's has an intuitive interface and custom SQL editor. With them, you can define your usage metrics and tailor your pricing models to match your business needs.

Ready to unlock the full potential of your recurring revenue strategy? Take Orb for a spin with our 30-day free trial and discover how it can help you achieve your business goals. Consult our flexible pricing options to find a plan that works for your business.