What is Recurring Revenue?

Recurring revenue, as the name implies, is the portion of the Income that the company will keep receiving for a while. These are different from the on-off sales. Recurring revenue is predictable. In other words, recurring revenue is defined as the period sales of the goods and services that generate regular revenue. This type of income is necessary for the businesses or service providers that rely on a consistent source of income.

A common example of recurring revenue is the service providers that sell monthly subscriptions of their services and charge customers at regular intervals (every month). It could also refer to the reputable companies that have garnered a lot of attention for their unique brand. These companies remain on top of the customer’s purchase list every time they go shopping. Anything that could guarantee the regular stream of income to the merchant will be considered as recurring revenue.

Long-term Contracts

Usually, companies create a long-term contract to generate recurring revenue. They offer regular services and deliver goods on a regular Basis in exchange for timely payments. For instance, internet service providers create yearly contracts with customers. They deduct fees from the customer’s Bank accounts every month in exchange for net services. This isn’t a one-time service.

The customer is highly likely to use the same internet service provider for the next years. Some companies request customers to sign long-term contracts to receive the services regularly. This is known as recurring revenue. It gives businesses certainty that the customer will make the payments monthly over a specific duration. Some companies also mention the cancellation clause, which states the fee the customer is supposed to pay if they cancel the subscription before the contract ends.

Auto-Renewal

Another common form of recurring revenue is auto-renewal subscriptions, which is trending. The service provider renews the contract automatically on a monthly or yearly basis unless the customer cancels the subscription. The best example would be the anti-virus registration plan or website domain registration. The customer is billed automatically at the end of the month. The payments are deducted from the customer’s bank account until the subscription is canceled manually. Companies that offer subscription-based services calculate the total recurring revenue by multiplying the income generated from a single user by the total number of users that are on an active subscription plan.

Loyal Customers and Special Accessories

Companies that offer services or products that are to be used with certain accessories or parts will also be counted in the recurring revenue. The customer cannot use this product without the accessory. These additional parts will generate recurring revenue for the business. For example, the coffee maker that can be used with only a specific type of cup will generate recurring revenue for the company. Another example is the companies that have a loyal customer base. If the company expects the customers to buy its products for years, then they can expect recurring revenue.