The term “recurring revenue” has become very popular in recent years. Companies that rely heavily on this type of business model are always talking about how they will need to maintain their recurring revenues if they want to remain successful.
But what is recurrent revenue, and why should you care? This article will go into more detail about net recurring revenue (NRR) and why it matters to your company.
Net recurring revenue – What is it and why does it matter?
So what is NRR, and why should you really care? Let’s look at some examples!
Suppose I tell you that I’m going to give away one million dollars today. Most people would say that’s great — but not me.
I know I have only spent money on this article so far, and we’re almost done, but let me make something very clear: I do not like giving away money.
It makes me feel uncomfortable and bad. So why am I telling you that I’ll be donating one million dollars to my favorite charity this week?
Because I believe that most people don't spend enough time creating experiences that offer lasting benefits to others.
We're too focused on making an instantaneous profit instead. By taking resources from elsewhere in the organization or outside the organization, a small sacrifice now can reap huge rewards down the line.
Companies that rely heavily on net recurring revenue to survive are typically viewed as more unstable than those that have other sources of income. This is due to the fact that NRV accounts for around 70% of Amazon’s total revenues!
NRVs come in two main forms: customer subscription services and software or service licensing. Both require significant investment up front, but do not incur additional costs after the initial purchase.
By keeping the balance sheet healthy by having both types of NRV, Amazon is able to remain competitive. They also know what money they will get every month, which helps mitigate risk.
However, there is an important distinction between the two types of NRV-customer subscriptions and software/service licenses. The latter type of NRV can be terminated at any time, while customers who opt to cancel their service contract are usually refunded back part or all of their payment.
In contrast, when you stop paying for your Netflix membership or drop your monthly Circle Pay plan, you lose access to your content and you forfeit your payments. This could hurt Netflix’s bottom line, but it doesn’t put much stress on theirs — unless something big happens like a major lawsuit.
For example, if someone else produced and uploaded Content You Have Cancelled, then people would still pay to watch it, just without watching yours. By protecting themselves from potential losses through various legal channels, Netflix avoids short term financial hardship.
One way to retain net recurring revenues is through up-selling or cross selling. This can be done via email, phone calls, in-person meetings, social media campaigns, etc. Depending on what channel you use, it’s important to know how much “buyer influence” each one has.
Email is typically the least powerful channel as buyers don’t usually respond well to them. A lot of times, they feel like you’re trying to get their credit card information or take advantage of them.
Phone calls are more powerful than emails because people tend to respond better to them. In person meetings are even stronger since you can physically see if someone is listening to you.
In-person meetings can also go very well or poorly depending on whether the other party feels comfortable talking to you or not. Social proof is an extremely strong influencer!
Having direct conversations about NRR is great but it only works when both parties want to talk about it. If they don’t seem interested then there’s little point in investing time into it.
Running across these power levels will help ensure your efforts do not waste themselves.
Companies that retain more of their net recurring revenues are typically better than those that do not. This is because, at the very least, they have enough money to maintain their current level of business- what some call “the base” or “the floor.”
By keeping up regular levels of service, these businesses also signal to potential customers that they believe in the product/service enough to keep investing in it, even during lean times.
This signals to would-be buyers that the company has confidence in its products and will stay committed to them for an adequate amount of time. It also gives other stakeholders (employees, vendors, investors) greater assurance that the organization will be around for the long term.
When a company experiences significant layoffs, this perception can disappear quickly. If people get the sense that your company may not be here next year, then how could anyone truly invest in it?
Intermediate success stories like Apple and Google prove that having robust recurrences is important. Both grew beyond initial expectations by maintaining a loyal customer base.
The main reason is poor product launch or failure to renew an existing service that was once profitable. A second cause is offering too little, which results in people canceling the service because there’s nothing for them to use!
A third common reason is launching a new version of a service when you don’t have enough data to know if people will pay for it. This happens more than you might think as most business owners aren’t totally transparent about spending money, what services they need, and how much value they get from a particular one.
Another big loss driver is unexpected rapid growth. Most businesses grow at a steady pace with some seasonal variations, but sometimes a lightning fast surge in activity requires extra investment and resources.
The most important thing that large corporations can do to retain more of their top line revenue is to understand how crucial customer loyalty is to their business.
This is especially true in the era of digital technology where customers are able to access your product or service anywhere, anytime. If you want to keep them as a paying customer, then you must maintain an excellent level of service that exceeds their expectations.
It’s easy for competitors to lure away customers because they may offer lower prices, but what happens if the poor quality service causes lasting negative perceptions?
At that point, these lost future revenues could turn into lost loyal repeat buyers which would seriously hurt your company. This will only get worse as competition increases due to the availability of cheaper alternatives.
There are several strategies that big businesses use to retain the loyalty of their customers. Some are better than others depending on the situation.
The first factor is how well you manage your total cost of acquisition (TCO). This includes direct costs such as marketing, advertising, and sales personnel, along with indirect costs like rent and legal fees.
The second factor is how effectively you market your product or service. If people don’t know who you are or what you offer, they will not buy from you.
The third major factor is how much profit you make on each sale. A small amount of profit per sale means there is not enough money left over to maintain your business.
The fourth reason why some companies lose more than they keep in re-engagement earnings is because they do not retain loyal customers. These individuals could easily switch out providers if you don’t give them strong reasons to remain.
Net recurring revenues can be enhanced through customer loyalty programs, freebies, and repeated purchases. All too often though, businesses lack motivation to keep up these rewards.
This article will talk about three ways to increase employee engagement and motivate them to keep the company afloat during slack times.
Most experts agree that bigger companies will have higher net recurring revenues than smaller ones. This makes sense because larger companies typically generate more income from their services or products than do small businesses.
The reason for this is simple: as business sizes increase, they need to spend more money to recruit and retain professional employees. These professionals are needed to run departments such as marketing, finance, human resources, and so on.
Furthermore, large corporations can afford to pay these professionals good salaries, which help keep them motivated and coming in the door every day.
On the other hand, small businesses often struggle to find enough funding to survive and succeed. They may be forced to offer lower paying positions or even close down entirely due to lack of funds!
So how much does it cost to retain workers at a big firm versus a small one? That depends on the person and what their position is, but overall spending per employee is usually around 6-8% greater at a larger firm.
However, there are some jobs where the opposite holds true – like when employers need to invest heavily in expensive equipment or technology.
The most basic way to define NRV is as gross recurring revenues less cancellations or deferrals, so this is often how many companies tend to calculate it. This can be tricky though because you have to be careful when defining cancellation or deferral.
If a customer cancels their subscription then this should not be included in the numerator of NRV since it no longer exists. Deferring a sale or ending a trial period also does not count because they are not future purchases.
On the other hand, if a customer ends a monthly service plan but continues to use some of the features within the app for free, this would still be considered an ongoing relationship and thus counted as recurrengce. Even better, apps may offer a pro-user account that doesn’t cost anything extra which could be excluded from the calculation.
This seems like a small thing, but it adds up very quickly and can distort the numbers. A lot of times B2C apps will offer professional accounts that don’t cost any money to keep using the app, tool, or feature. These accounts usually go by something like “Power User” or “Academic Free Plan.