What is recurring revenue?
SaaS companies generate income through subscription packages. That usually means customers either pay a monthly subscription fee or an annual subscription fee.
For example, you have a subscription offer for $100/month and 500 customers with a monthly subscription. Your Monthly Recurring Revenue (MRR) is $50,000/month. Assuming your customers don’t churn, your Annual Recurring Revenue (ARR) is $600,000/year.
You may wonder: What if my customers sign up for an annual subscription?
Your MRR and ARR remain the same. The only difference is, instead of paying you $100 every month, each customer will pay you a lump sum of $1200, usually at the start of your customer relationship.
While recurring revenue is the foundation of SaaS businesses, it’s not exclusive to them only. Any business can be a subscription business.
For example, a manufacturing business may sell monthly maintenance packages as a subscription, and a coffee roaster can ship a package of coffee bi-monthly to its regular customers.
As long as your customers continue to pay for your product or service regularly, that is recurring revenue.
Go deeper: Monthly Recurring Revenue.
What is non-recurring revenue?
The distinction between both types of revenue is straightforward. Non-recurring revenue is a one-off payment for a specific product or service.
For example, an onboarding package. Let’s say your new customer just signed up for a monthly subscription but needs help onboarding very quickly.
Instead of figuring out the ins and outs by themselves, they purchased an onboarding package to receive training from you for $500. There are no repeat sales for that package once the onboarding is done and dusted. That is non-recurring revenue.
Separating recurring revenue and non-recurring revenue
Both types of revenue generate income. However, the question is: should you take this distinction into account in your SaaS metrics?
Yes. Recurring revenue and non-recurring revenue should be categorized separately in your financial reporting and growth metrics. Here’s why:
Your recurring revenue impacts the calculation in your:
- Customer Lifetime Value (LTV)
- Churn rate
- Company valuation
- Customer Acquisition Costs (CAC)
- Net Revenue Retention (NRR)
- Revenue and Cashflow forecasting
If it’s that simple, what’s the confusion?
The main reason for this common confusion is the lack of understanding of revenue recognition–especially with businesses that offer annual subscriptions. Revenue recognition is when your business ACTUALLY earns the revenue.
Go deeper: Revenue recognition 101
For example, let’s say your new customer in the previous scenario signed up for an annual subscription in January instead. They also added an onboarding package for $500 to the purchase. Assuming your pricing remains the same, your variables are:
- Annual subscription: $1200
- Onboarding package: $500
Your total revenue for January is $1700.
Many companies tend to recognize the entire sum in January like this:
In this scenario, it looks as though you don’t have any revenue from February onwards. Verdict?
Your MRR statistics and Profit&Loss are going to be incorrect (and slightly crazy, in the wrong way).
The correct way to recognize your revenue is to take $100/month during the 12 months for your recurring revenue and an additional $500 in January (or whenever you make the sale) for non-recurring revenue.
Often, recurring revenue is scalable and easy to forecast when you know the customer lifecycle and churn rate. To make your financial reporting more accurate to execute your growth strategy better, start by identifying the distinction between recurring revenue and non-recurring revenue.
Go deeper: Revenue recognition 101