What is Recurring Revenue
Recurring revenue is the portion of a company's revenue that is highly likely to continue in the future. Recurring revenue is revenue that is predictable, stable and can be counted on in the future with a high degree of certainty.
BREAKING DOWN Recurring Revenue
Businesses, investors and analysts pay particular attention to a company’s revenue, also known as its top line, recorded on the income statement. The top line determines the bottom line, or profit, since all expenses and taxes are subtracted from revenues to get net income. Revenue can consist of one-time sales or a stream of expected periodic sales. The latter, known as recurring revenue, is very important to businesses that are concerned with maintaining a constant and consistent stream of revenue.
Recurring revenue has various forms for each company. For example, a cable company that has millions of customers paying monthly could consider a large portion of its monthly revenue to be recurring in nature. Hard contracts are also notable sources of recurring revenue at cell phone companies, which require subscribers to enter 2-, 3- or 5-year contracts with monthly payments.
Monthly recurring revenue is arguably the most important metric for subscription businesses. Evergreen subscriptions, such as auto-renewal policies like Microsoft Office 365, Norton/McAfee anti-virus registrations, Apple iTunes, cloud services, internet domain registrations, print or digital news publications, etc. are examples of sources of revenue that are recurring for a firm. A business is sure to collect on these payments until customers terminate their subscriptions. Monthly recurring revenue for subscriptions is simply calculated by multiplying the total number of paying users by the average revenue per user (ARPU).
Companies that sell products in the market that can only be used with other accessories produced by the same company can count on receiving predictable revenue in the future. For example, a toilet bowl brush stick that can only be used with specific scrubbing brushes, a shaving stick which only fits customized razors, a personal coffee maker that only accepts one brand of cups, and the like will always require refills, the sales of which act as recurring revenues for businesses.
In addition, a company with an established brand name in its market space has a loyal base of customers that are sure to keep purchasing the company’s products. For example, The Coca-Cola Company has built an exceptional brand and loyalty among consumers who consistently purchase Coca-Cola drinks in bottles and cans of different sizes, prices and packages. While companies with an established and loyal base have set a foundation for receiving recurring revenues, we can also say that companies that set up recurring revenue business models have an opportunity to reach out to customers more frequently and build a loyal customer base.
Many market pundits consider recurring revenue to be a highly desirable quality for a company to have. Recurring revenue makes a company more stable and predictable both operationally and financially. This, in turn, lowers the risk associated with a company's operations, though negative word of mouth or bad publicity can easily reduce this sense of security.