Recurring revenue: Why it matters and how to boost it

Our guide will show you all about recurring revenue and how it helps your business grow. We'll cover everything from the definition of recurring revenue and its importance to the various models for boosting its potential.

What is recurring revenue, and why does it matter?

Recurring revenue is money that a company gets on a regular schedule. This money comes from subscriptions, contracts, or memberships. It's different from one-time sales. It comes in repeatedly on a set schedule. This flow helps with planning and growth.

Quick distinction: People sometimes mix up "recurring" with "reoccurring." Recurring means it happens on a set schedule (like every month or every year). Reoccurring means it might happen again, but not on a fixed schedule. Recurring is better for predicting future income.

Why is recurring revenue important?

Recurring revenue gives your business a stable foundation that lets you plan ahead with confidence. Here’s why it’s important:

• Planning and stability: You can make budgets and plan for hiring more easily when you know how much money is coming in. Investors also like the stability.
  ‍
• Stronger customer relationships: Ongoing subscriptions help you build long-term connections with customers. This increases their lifetime value (how much they're worth to your business over time).
  ‍
• Efficient growth: You can keep existing customers more cheaply than always finding new ones.
  ‍
• Clearer operating metrics: You can track the average money from each user (ARPU), customers who leave (churn), and how groups of customers perform. These metrics help manage recurring revenue with more precision. 

Compare recurring revenue models

To help you weigh your options, here's a brief overview of the pros and cons of each recurring revenue model.

A closer look at types of recurring revenue models

The right recurring revenue model makes a big difference when you're building a successful SaaS business. Here's a look at some popular options.

1. Usage-based billing

Customers pay based on how much they actually use the product in this model. This model offers fair pricing that matches what customers need. It encourages them to get the most out of your service.

Why it works for SaaS companies

• Scalability: Your pricing can grow with your customers' needs with this model. It works for businesses of all sizes. 
• Flexibility: Customers can change how much they use and spend. They become happier when you give them this control. 
• Lower starting costs: Lower upfront costs can attract customers who might not want to commit to a fixed subscription fee right away.

2. Fixed contracts

Customers sign up for a specific service at a set price for a certain time with fixed contracts. This model gives predictability for both you and your customers.

Why it works for SaaS businesses

• Stable revenue: Fixed contracts guarantee a steady stream of revenue for the duration of the contract.  
• Customer commitment: This model encourages customers to engage with your service for a longer period. The consequence is an increase in their lifetime value.   
• Simpler forecasting: Fixed contracts make it easier to predict future revenue and plan ahead.  

Note: For businesses working with enterprise contracts, understanding CARR (committed annual recurring revenue can provide valuable insights into future revenue streams.

3. Service retainers

Service retainers are common in SaaS businesses that offer ongoing support. Companies that offer consulting or maintenance services also use them. Customers pay a recurring fee to access a certain level of service or expertise.  

Why it works for SaaS groups

• Guaranteed revenue: This model provides a predictable revenue stream from ongoing service contracts.
• Stronger customer relationships: Regular interactions foster closer relationships and build trust.  
• Upselling opportunities: Retainers can open doors to upselling additional services or features.

4. Auto-renewing subscriptions

Customers subscribe to your service on a recurring basis. Their subscription automatically renews until they choose to cancel.

Why it works for SaaS companies

• Convenience: Auto-renewing subscriptions make the payment process simple for customers. They guarantee uninterrupted service.
• Customer retention: Automatic renewals encourage continued usage and reduce churn.  
• Growth potential: This model provides a foundation for growth and predictable revenue streams.

5. Tiered subscriptions

Tiered subscriptions offer different levels of service or access at various price points. You can serve more customers with different needs and budgets with this type of recurring revenue model.

Why it works for SaaS corporations

• Customer choice: This model empowers customers to choose the plan that best fits their requirements and budget.  
• Upselling potential: It provides a clear path for customers to upgrade to higher tiers as their needs evolve.
• Increased revenue: You can boost how much money you make by offering premium tiers with advanced features.    

Note: Want to explore more pricing strategies? Read our in-depth guide on SaaS revenue models to discover additional approaches for your business.

What happens if you don’t have recurring revenue?

Your business faces three key challenges if you don’t have recurring revenue:

• Unstable cash flow: Planning and hiring become guesswork.
• Unreliable forecasts: Pipeline swings cause missed targets.
• Slower growth: You spend more to replace one-off sales instead of growing net revenue.

Customer relationships are usually ongoing rather than one-time interactions in SaaS companies. These relationships make recurring revenue even more important. It gives you a stable base to build customer loyalty, improve your product, and grow your business.

Benefits of recurring revenue

Recurring revenue is a catalyst for growth and long-term success in the SaaS industry. Here's a breakdown of the key benefits:

• Better predictability: You can plan finances better when you know what to expect each month. This stability lets you make smart decisions about product investments, hiring, and product development. 
  ‍
• Increased customer lifetime value (LTV): Recurring revenue models often create stronger customer relationships. Customers become more loyal supporters when they commit to ongoing subscriptions. The result can mean a higher LTV.
  ‍
• Lower customer acquisition costs: Recurring revenue streams help with keeping customers. These cost savings reduce the pressure to constantly find new customers. It can also help lower customer acquisition costs (CAC) over time.
  ‍
• Better valuation: Investors often see businesses with strong recurring revenue income streams as more stable. These businesses become more attractive to investors, potentially leading to higher valuations.
  ‍
• Opportunities for upselling and cross-selling: You can increase average revenue per user (ARPU) by offering extra features or related products to your existing customers. This advantage drives more revenue growth.
  ‍
• Data-driven insights: Recurring revenue models generate a wealth of valuable data. You learn about customer behavior and what they like by looking at metrics like churn and engagement.
  ‍
• Scalability: Recurring revenue gives you a solid foundation for growing your SaaS business. You can invest in infrastructure, expand your team, and support more customers with predictable income.

How to calculate recurring revenue

Start with the two core metrics:

Monthly recurring revenue (MRR):
MRR = number of active paying customers × average monthly price per customer. Exclude one-time fees.

Annual recurring revenue (ARR):
ARR = (Annual subscription revenue + other ongoing recurring fees) − cancellations, expressed on a one-year basis. Exclude one-time charges.

Common pitfalls to avoid:

• Do not include setup fees, hardware, or services that are not recurring.
• Use the current year numbers rather than the highest "exit year" for multi-year contracts.

Example: Your MRR = $5,000 if you have 100 customers at $50 per month. Multiply MRR by 12 ($60,000) if you bill monthly and want ARR. Then subtract yearly recurring cancellations or downgrades.

Note: To dive deeper into specific recurring revenue metrics, check out our guides on MRR (monthly recurring revenue and ARR (annual recurring revenue for SaaS businesses.

How to boost recurring revenue in 10 simple steps

1. Tighten onboarding: Help new customers reach first value fast to cut early churn.
2. Ship upgrade paths: Add clear steps from lower tiers to higher tiers. Use prompts inside your product.
3. This month’s expansion goal: Identify one usage or feature that drives expansion and promote it.
4. Reduce involuntary churn: Improve dunning, multiple payment methods, and card-update flows.
5. Offer annual prepay: Exchange a discount for upfront cash and better retention.
6. Bundle with intent: Package features customers often buy together to lift ARPU.
7. Run pricing experiments: Test thresholds, minimums, and caps to balance predictability and scale.
8. Target at-risk cohorts: Use product and billing data to detect churn patterns and intervene.
9. Launch add-ons: Create paid add-ons that map to advanced needs.
10. Measure what matters: Track ARPU, churn, and expansion revenue monthly. Review trends quarterly.

How to select which recurring revenue type is best for you

The right recurring revenue model is an important decision for your SaaS business. Think about these key factors to help you make the right choice.

Your target audience

It's essential to understand your ideal customers. Are they individuals, small businesses, or large enterprises? Consider their needs, budget constraints, and usage patterns. 

Startups with limited budgets might be drawn to a usage-based model or a tiered subscription plan with a low-cost entry point. Large enterprises might prefer the stability and predictability of fixed contracts.

Your product or service

Your product type will affect the best pricing structure. Ask yourself: What are you offering? Is it a main software application, a supplementary tool, or an ongoing service like support or consulting?

Tiered subscriptions let customers choose the level that best suits their needs if your product has a wide range of features.

Your business goals

Align your revenue model with your overall business objectives. Are you focused on rapid growth, customer acquisition, or maximizing profitability? 

A usage-based model can help attract more customers with flexible pricing if rapid growth is your goal. Fixed contracts or tiered subscriptions can help boost revenue if you're aiming for high profitability.

Your resources and capabilities

Evaluate the resources you have available. Consider your team's capacity, your tech stack, and your ability to manage various billing structures. 

Usage-based billing may need more refined tracking and billing systems. Fixed contracts might require a dedicated team to manage contract negotiations and renewals.

Note: Once you've chosen your revenue model, you'll need the right tools to implement it. Learn more about recurring revenue software solutions that can simplify your billing and subscription management.

Let Orb help you expand your billing options

Now, how do you bill users accurately with a recurring revenue model?

Orb is the tool that can elevate your billing strategy to new heights. Orb is a billing platform that provides businesses with the tools and insights to boost their recurring income. Whether you're a startup or an enterprise, Orb allows you to easily manage your billing processes.

Here's how Orb can improve your recurring revenue strategy:

• Accurate and transparent billing: Orb ingests raw event data, turning it into accurate and transparent invoices for your customers. Our platform helps you build trust and reduce billing disputes.
  ‍
• Pricing management: Orb's plan versioning features let you create diverse pricing tiers and easily manage them without messy spreadsheets. This enables you to evolve your pricing strategy as your business grows.
  ‍
• Decision-making based on data: Orb provides detailed financial reports. These reports give you valuable insights into your revenue streams and customer behavior. This data helps you to make better decisions about your pricing and customer success initiatives.
  ‍
• Workflow integration: Orb integrates with popular data warehouses and accounting software. We help facilitate your billing operations and lower the risk of errors.
  ‍
• Pricing iteration without rewrites: Define billing metrics using the Orb SQL Editor or a visual editor and build new pricing plans. These tools help you evolve pricing quickly and easily without engineering.

Ready to unlock the full potential of your recurring revenue strategy? Consult our flexible pricing options to find a plan that works for your business.