An important metric to gauge the health of an organization is how much recurring revenue it generates. This is also referred to as “sustainably strong” income, because this type of income comes in consistently every month or quarter without any special events happening.
You will probably know some companies that rely almost entirely on sales for steady income, but most successful businesses have more than one source of income. For example, advertising can be a major source of income for a company, but what if they run out of ads to place? Or what if no advertisers want to spend money on advertisements during a certain time frame?
That is when their other sources of income come into play. A business that has many different products or services can shift their focus to those products or areas to make up for lost advertising income. They may even develop new products or services to draw attention!
For Example: Netflix
Netflix was not at first known for its movie content. In fact, people were mostly using it to watch TV shows. But now that streaming service boasts over 130 million subscribers worldwide!
This does not happen overnight, however, so it takes investment in the product before people start flocking to it. Just look at how quickly Amazon Prime grew in popularity!
With all these opportunities to earn income, there are several key metrics you should pay attention to when calculating recurrent revenues. These include: average order value (AOV), customer retention rate, and gross profit per sale.
A kpi (key performance indicator) for any company that seeks to grow their business is profit per customer. This kpi quantifies how well your business is doing in terms of making money off each individual customer.
A lot of entrepreneurs make the mistake of only focusing on this kpi, but it is very limited. It may seem straightforward, but looking at just this kpi ignores the key part of growing a business — acquiring new customers!
By ignoring this crucial piece, an entrepreneur could lose out on significant growth opportunities forever. They might even fail because they are not giving themselves enough time to develop and capitalize on these opportunities.
That’s why I have created another kpi for you to consider as you continue to read about ways to achieve success with your business. It’s called the “recurring revenue ratio.” Let’s take a look now.
Many successful businesses have their initial launch with only one model- they start by offering a product or service for free before asking for payment later. This is how most big companies got their foot in the door!
Amazon, Netflix, and Spotify are all great examples of this.
By providing users with content they want for free, these brands win new followers and eventually purchase paid subscriptions to access more of the content.
This business model is called “freemium” (paying for some things but not others) because you have two types of customers: ones that pay to use certain features and ones that do not.
For example, someone who does not subscribe to Amazon Prime will still be able to read online books for free – just without the fast shipping.
This is why there are so many self-help books available on Amazon today - people who never subscribed to Prime can get helpful advice for little cost.
Recurring income comes from the continuous use of your services, whether it's monthly payments for a membership site or yearly fees for professional services.
Not every company can survive off of only one type of income, but if you're willing to give up the short term profit in order to build long term success, then the freemium model may work for you.
A key performance indicator (KPI) for any entrepreneur is how well they are doing in terms of profit. This includes both short-term and long-term goals, depending on what stage of business you are at.
For some entrepreneurs, their number one goal is to make as much money as possible in the short term through profit. These individuals will focus more on growth strategies such as offering lower price points or finding new ways to market products.
However, if your main goal is to create a company that does not need to make a large amount of income every month, then investing in recurring services and products can be your best bet.
Services and products with recurring payments do not require an investment in expensive equipment or facilities, which may cost upfront costs that take time to recoup. These types of businesses also offer consistent monthly income, making it easier to maintain momentum on other things like educating yourself and developing relationships.
There are many different types of businesses that use recurring payment systems. Some examples include fitness studios that pay for memberships per month, online courses that students can purchase without having to buy each lesson individually, and websites that earn advertising dollars from users who visit often.
In this article, we will discuss some important tips for creating and running your own recurring service business.
The second metric is called ‘average order value’ or AOV for short. This calculates how much money you made per average individual buyer of yours.
AOV = (Total Sales – Average price purchased from you)/total individuals who bought something from you.
The reason why we use total sales instead of just revenue is because some people may have bought more than one item from you, but it all came to the same amount in terms of profit! So using total sales gives us an accurate AOV number.
Now that we know what AOV is, let’s look at another recurring revenue KPI: the average time between purchase and refund.
2) Calculation of average time between purchase and refund
Divide the length of time since the last sale by the number of days until the next sale. Then take this ratio of time overage/gap to get the average.
A recurring revenue business model is one that relies on there being more than enough of your product or service to satisfy your customers. This is different from a model where you depend on a limited number of clients to make money, such as through traditional freelancing or sales models.
With the latter, your income depends heavily on having enough active sellers (clients who pay for your services) each month to meet their spending needs.
In the former, your income depends on there being sufficient numbers of people using your products and/or offering your services to make paying for them worthwhile.
By adding this layer of stability to your business, it can help mitigate risk in your career. You will not suffer large losses like you would if you had to close down your website for lack of income due to poor weather, health issues, etc.
You also won’t need to worry too much about running out of capital to keep your company afloat when things get really tough because you have backup coming in in the form of its own profits.
A recurring revenue business has two major advantages over a traditional income model. The first is that they do not have to worry about how they will be paid at any given time, because you have systems in place for bringing in new clients or charging current ones for future services.
The second advantage is that there are no break-points where the business comes to a halt, because it does not need to rely on one source of income to survive.
As we discussed before, this can create stress when there are gaps in income due to external factors like bad luck, poor timing, or if someone else also earns more money than usual.
With a recurring revenue business, you keep offering your service and supporting your existing clients even during these times. This keeps your reputation intact, and people come back to you as soon as things return to normal.
Now that you have determined what type of business has successful recurring revenues, how much money they make, and what factors contribute to their success, it is time to set your goal!
Most entrepreneurs start businesses with the intention of making lots of money quickly. This is great if you are in it for the quick cash- most people aren’t, though.
The more passive owners invest their energy in the long term growth and stability of the company. These types of owners are sometimes referred to as “team players.”
By being a team player and investing only in companies that will succeed (and failing fast by dropping out), your income comes from the company not you. This takes some pressure off of you to keep up with additional commitments such as paying bills and saving for emergencies.
This article about kpieconomy strategies can be found here.
If you would like to give yourself a chance at having a steady flow of income, consider giving away parts of the business or even selling all of yours and joining a CRM provider!
A CRM stands for Customer Relationship Management. Companies use these products to connect with customers and grow their business.
After you have determined your revenue source, next is to develop a marketing strategy to get more of it. This can be done through social media postings, advertisements, giveaways or coupons, creating an online store, sending out emails – all of these strategies depend on what type of income you want to bring in.
It’s important to know that not every person who visits your site will buy something, so having a clear goal for your website helps focus only on those people who will benefit from your products or services!
By developing your business into a recurring one, you will also need to determine how much money you are able to spend to promote yourself, as well as maintain your site.
You will want to find a balance between spending enough to achieve your goals, but not too much where your budget gets cut down. It is very common to use free resources to test different advertising methods, which help to keep the costs down.
