The term recurring revenue comes from the theory of business that says you do not need large amounts of initial capital to start a successful business. You can begin by offering services or products people are willing to pay for regularly.
The word recurring is important because it implies that the income stream will be there even after your company has gone out of business. For example, someone could go into another business and require your service or product every month or yearly. This would create continuous flow of revenue!
Recurring also implies that this income stream will continue even if there is no one in the workplace doing what you do. For instance, a recruiter may offer his or her professional services to recruit new employees at a regular rate. Even if there are no open positions, they still get paid!
There are many ways to calculate recurring revenue, but the two main components are average transaction value and time frame. To determine the first, you must know how much the service/product costs. To find the second, you have to understand how long it takes to recoup the investment.
With both numbers in hand, you can subtract one form the other to obtain the amount of money made per unit time. This is referred to as return on investment (ROI) and is very important when deciding whether or not to pursue this type of income source.
A key part of calculating recurring revenue is knowing what metric to use for the average purchase. Most companies that have recurring services calculate the average monthly spend, which is typically reported as either a per month or per year price.
Per month means that you divide the total cost by the number of months it was purchased to get an accurate measurement. For example, if a person purchases a service plan for one year, then it would be calculated using this formula: Yearly cost / Number of months Purchased = Average monthly spending.
A yearly price does not factor in how much the customer paid during the initial sale but only costs for subsequent months. This can distort the true cost of the recurring service as it excludes any discounts or rewards for early buyers.
By using a monthly price, on the other hand, now includes any discounting or reward programs that may exist. These need to be factored into the overall cost calculation. Many vendors will offer special deals such as “buy X products and earn Y money back”, where X equals the monthly price and Y equals the cost of the product.
These types of rewards can reduce the actual cost of the service significantly, making it seem like a cheaper option than it actually is. By excluding these benefits when calculating the average price, we are more accurately estimating the cost of the service.
The second way to calculate recurring revenue is to multiply the average purchase amount by the life of the product or service to determine annual revenue. This method assumes that the price stays constant over time!
For example, if your monthly yoga class has an average cost of $150 per month then you would look at it one year from now to find its annual revenue. You would simply add up all those costs multiplied by 12 to get the total yearly income.
This calculation can be tricky because you have to remember how long each item will last. For instance, let’s say you are selling gift cards for Starbucks.
Your customers can buy a gift card any number of months after the anniversary of their birthday. (So actually, the length of time varies.)
If we used the first method to calculate IRP, we would not include the additional savings users receive by buying a gift card as opposed to purchasing a new coffee shop membership or T-shirt.
That does make sense since people who need a large discount already know about the business and might want to return in the future. But using the second method, we should! Because even though they are buying a “goodie bag”, they are also spending money directly on advertising the business and supporting it financially.
There is no exact formula for calculating IRP but there are some helpful tips and tricks.
Now that you have an understanding of what recurring revenues are, how to calculate them, and what factors can influence the amount of recurring income you earn, it is time to apply these concepts to your business!
So, let’s look at some examples. Suppose you own a grocery store and offer a weekly discount to people who spend a certain amount each week at your store. This is a common way to use up frequent flyer rewards or reward points for customers.
You could also have a monthly membership site where members pay a fee per month to access limited resources or services. For example, if your member website offers educational content, you might charge a monthly subscription to view all of that content.
This article will talk about ways to implement this concept into your business and how to maximize your recurring income.
The second way to calculate recurring revenue is multiplying the months in an annuity period by the average daily revenue for that business. For example, if you are calculating how much MoneyGram would make per day for one full year, then multiply this value by 12 to find their annual revenue.
Moneygram makes enough money each year to cover its monthly costs so we can assume they will stay in business forever! (Not really sure what to tell you about this one haha)
This method assumes that the amount of revenue received during the time frame stays constant which is not always the case though. If something happens like there is a natural disaster or a major event that cuts into revenue, this formula may not work as well.
However, this is still a good way to determine how many dollars Moneygum will earn per year since it does not factor in potential losses.
Now that you have determined how much in total sales your business has, you can calculate how many recurring payments you will receive with this new system!
The easiest way to do this is to use the same method twice! Once for monthly revenues and once for yearly revenues!
To determine how much money you will make per year, take the annual revenue amount and divide it by 12. This gives you an estimated income for one full year.
Now, to find how much money you will make per month, multiply the yearly income by 30 (this adds up all the months as a professional accountant).
Now, let’s look at how to calculate recurring revenue using the numbers in our example. First, we will multiply the number of dollars of revenue by the percent of revenue that is recurrent. In this case, we are multiplying $1,000 times 70% which equals $700 in recurring revenue.
That makes sense because 70% of our total revenue was recurring revenues! You can also refer to it as one third of the business being repeat customers or having loyal clients.
This calculation does not include any additional costs associated with running the business such as marketing expenses or employee salaries. It only includes the actual money made through the recurrence of the product or service.
Monthly recurring revenues are calculated by multiplying the amount spent on marketing each month times how many months it was run. For example, if you paid $1,000 per month for advertising for one month, then that is counted as one thousand dollars in monthly recurring revenue.
If this sounds confusing, don’t worry! There are simple ways to calculate MRR. Here are some tips.
First, you need to know what type of business has MRP. This can be done via different types of revenue models or income streams.
For example, an online store that offers free shipping would have very high direct-to-consumer (DTC) sales, but no MRP. A company that sells nutritional supplements will have higher MRPs due to the price of their products, but low DTC sales because they cost a lot to ship.
A media site that runs sponsored content would have both, with lower DTC than PPV sponsorships but much higher MRVs from CPV sponsors.
The difference between these types of businesses is just knowing which ones have which kind of income stream. And there are several tools and strategies to find out more about your business.
Second, you should check whether your current revenue model has MRP. If not, you should look into changing that! Many small businesses lose money because they do not recognize the value of having an MRP program.
Now that you have determined how much money your company makes per day, you can calculate how many days of revenue your company has when looking at it over a whole year!
To do this, divide MRR (monthly recurring revenue) by the number of months in a year to get an average amount of business done each day within a year.