The term net recurring revenue (Net RVR) is typically defined as “the difference between total revenues, including one-time revenues, and total expenses,” according to Dan Manchegan of Forrester. This definition was popularized by TechCrunch in their article titled, “The Best Way To Calculate Your Startup’s Net Book Value.”
However, this definition only calculates what it refers to as the ‘net book value’ or ‘net asset value’ of your company. It does not take into account other important metrics like average monthly growth or return on investment (ROI).
This can be problematic if you are trying to determine whether or not your business should go public, or invest more money in new equipment or marketing strategies. If you don't know how to calculate these additional metrics, investing may not be the best option for you!
Average Monthly Growth = Total Amount Of Money Generated In A Given Period Divided By The Number Of Months In That Same Time Frame.
Return On Investment (ROI) = Total Profit As A Ratio Of Cost
We will discuss how to properly calculate each of these metrics in detail, but first let us review some basics about starting up and running a successful business.
Basics About Starting Up An Business
As we mentioned before, the initial cost to start a business includes buying all of the necessary tools and equipment.
Now that you have determined how much total annual revenue your business has, you can determine what percentage of those revenues is due to net new customers or retention programs. This ratio is important as it determines if your business is growing because of external factors or internal systems such as rewards programing or marketing materials.
By looking at the proportion of recurrent versus one time purchases, we are able to calculate the amount of net recurring revenue in the form of monthly subscriptions, yearly memberships, and repeat purchase transactions.
For example, let’s say your company sells software products and services for $100 per year. A person who purchases the product and service pays either annually or monthly, but never again once their subscription expires.
This person would count as one time sales since they did not renew their membership or subscribe to a monthly plan. By using this information, we can calculate the net recurring revenue by taking the total sale price and dividing it by the total number of times it was sold. In our previous example, this calculation would be 100 ÷ 1, which equals 100% NET RECURNING REVENUE!
If you want to learn more about why having net recurring revenue is important, read my article here. It will help you identify strengths and weaknesses of your business and give you tips on ways to improve your revenue.
The app that has the highest NRR is not necessarily the one with the most subscribers, nor is it the one that makes the most money per subscriber. The app with the highest NRR is the one that brings in the most income from all sources — not just subscriptions, but also A-list sponsors, mobile phone credit, etc.
NRR can be influenced by many different factors, such as how much free content an app offers its users, whether or not there are discounts during certain times periods (such as at launch), and what kind of rewards users get for using the app (tokens you can spend elsewhere).
There’s no hard and fast rule about which factor is more important than the other(s) when calculating NRR, so feel free to make changes to any of them without making assumptions about the effect they will have.
But if you want to increase your NRR, you should consider offering some type of subscription service, having greater supply of high quality content, offering more expensive paid features, promoting your app through various channels, and spending time developing your app and marketing it.
Gross recurring revenue = (gross profit - cost of goods sold) / average transaction time
REASON: This calculation determines how much money you make per unit of time in relation to your business. The average transaction time is defined as the length of time it takes to complete one transaction for your business.
The average transaction time can be affected by several factors such as season, number of people online at a given time, or even outside forces like weather that may prevent people from coming into your business.
Gross recurring revenue (GRV) is defined as the total amount that an organization receives in income or revenue from a product or service it offers, more commonly known as sales. This includes all sources of GRV such as monthly subscriptions, one-time purchases, paid downloads, etc.
Net recurring revenue (NRR) is calculated by taking GRV and then subtracting direct expenses related to the product or service. These costs include salaries, marketing materials, physical products, office supplies, and more.
The term “net” implies that even though these expenditures are not directly associated with the offering of the product, they reduce the profitability of the company. By including these fees in the NRR calculation, we can see how much money the business makes while also accounting for the cost of running the business.
Let’s look at an example!
A small business that offers free educational resources for high school students can easily run into major issues if they underestimate how much money they will make in recurrences.
Recruiting student contributors costs of materials, staff time, and organization fees can add up quickly. And even after those expenses are covered, you have to pay for server space, domain names, and other technical infrastructure needed to operate the site.
All of these cost components contribute to what we refer to as “net recurring revenue” or NRR for short. The NRR is calculated by taking all of these direct costs (cost of goods sold + operating costs) and then deducting their corresponding indirect costs (rent, utilities, etc.).
One of the most important things to look at when calculating net recurring revenue is how much of an up-front cost or investment you have in a product or service.
If there’s little to no initial investment, then it’s easier to achieve higher net recurring revenues because you can easily make more money from a product after buying it (by selling additional products or services).
On the other hand, if there’s a large up- front cost for a product, then it becomes harder to generate as much income per unit sold. This could be due to limitations of the product, or because people are naturally budget conscious, so they don’t want to spend too much money on something new.
It also depends on what kind of value you get out of the product.
The first major factor is how many months an item has been in the business’s inventory. If you have to buy this product for every member of your audience, it will not make as much money per month because there are fewer total units sold per month.
The second important factor is how large of an audience the products or services are marketed to. More targeted products require more investment at the beginning, but they generate higher MRR over time.
The third important factor is how expensive the products or services are. A very expensive item requires more of an initial investment, but it generates less income than a cheaper one due to the price difference.
When calculating MRR, remember to include all three of these components when figuring Gross Monthly Recurring Revenue (GMR).
The second way to calculate your NRR is by subtracting your total expenses from your total revenues. This is referred to as deducting gross profit or direct operating profits (DOAP). Gross profit is defined as all of the money that comes in during a time frame, less the costs for running the business. Total expenses include cost of goods sold, marketing, website fees, and other general business expenditures.
By calculating this number you get an idea how much money was left over after paying bills and developing the business. A common way to look at it is to compare what is left over with the starting budget. If the amount left is higher than the original budget, then you have a profitable month or year!
Another way to look at this is to determine if you are keeping more money per product sold than the initial investment in the product. This shows profitability!
If you want to know where your NRR lies, you must understand both sides- income and expense.