Software Growth

Recurring revenue

Recurring revenue is income that repeats automatically on a schedule, usually from subscriptions, and can be predicted with reasonable confidence.

Recurring revenue is the reason investors and acquirers like software subscriptions. Customers keep paying until they cancel, so next month's income is largely known today. One-time sales have to be won again every month. Recurring revenue compounds.

What counts

Revenue is recurring when it comes from a contract or subscription that renews on its own at a regular interval and the charge is predictable. Typical examples:

  • Monthly or annual plans on a standard subscription model.
  • Per-seat fees that renew with the plan.
  • Add-ons billed on the same schedule.
  • Committed minimums in a usage contract.

What does not

  • Setup, onboarding and migration fees.
  • Consulting, custom development and training.
  • One-off purchases, such as a lifetime deal payment.
  • Free trials and unpaid users.

Baremetrics excludes one-time fees and non-recurring charges from MRR, and Bessemer's Atlas separates recurring revenue from non-recurring items such as services and transactions, calling the sum run rate revenue instead of ARR.

Variable usage: a gray area

Pure usage-based revenue repeats but is not fixed. Some companies count only the committed minimum as recurring and treat the rest as variable. Others count a trailing average. Whichever you choose, say so when you report the number, because it changes how a buyer values you.

How to measure it

Recurring revenue is tracked as MRR in the short term and ARR as a yearly view. Normalize annual or quarterly plans to a monthly amount before adding them up.

A $480 annual plan is $40 of MRR. Ten of them, plus 50 customers at $20 a month, give 400 + 1,000 = $1,400 of MRR.

Why it matters

Predictable income lets you hire, build and spend on marketing against a known base rather than hoping next month sells. David Skok's SaaS Metrics 2.0 builds on this, since once you know what a customer is worth over time, you can decide how much to spend to acquire one.

It is also what makes churn the number to watch. Recurring revenue only stays recurring if customers stay, so retention sets how much of it you keep.

Small SaaS angle

A bootstrapped product with $8,000 of recurring revenue is often worth more, and safer to run, than a services business with $20,000 of irregular income. Do not blur the two. If part of your income comes from consulting or custom work, report it separately, and treat it as a way to fund the product, not as part of the base.

Sources

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