Recurring revenue explained

What is recurring revenue? - MRR and ARR explained

What is recurring revenue? It’s a vital part of subscription-based businesses, providing a steady and reliable source of income.

In this blog article, we will explain what recurring revenue is and focus on two important metrics: Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).

By understanding these metrics, you can get a better idea of how subscription businesses make money and plan for their future growth.

Let's get started and explore the world of recurring revenue!

What is recurring revenue?

Recurring revenue refers to the revenue generated by businesses through ongoing subscriptions or contracts for products or services. Unlike one-time transactions, recurring revenue provides a predictable and continuous stream of income.

To help you understand, here are three examples of recurring revenue use cases in b2b SaaS industry:

1. SaaS companies offer their software applications through subscription models, where customers pay a recurring fee to access and use the software. This model allows businesses to generate consistent revenue as long as customers continue their subscription.
2. Companies that provide cloud storage or hosting services charge customers based on their usage or subscription plans. Customers pay a recurring fee for the storage or hosting resources they utilize, allowing the service provider to generate ongoing revenue.
3. Service-based companies that provide website maintenance services charge customers a recurring fee for ongoing website updates, security checks, and technical support. This model allows the company to generate predictable revenue while providing valuable services to their clients, fostering long-term relationships with them.

Understanding the difference: recurring revenue vs. non-recurring revenue

It's so important to understand the difference between recurring and non-recurring revenue because it allows businesses to develop appropriate strategies for sustainable growth and make informed decisions about resource allocation and investment opportunities.

To understand that difference, consider the following:

Recurring Revenue:

• Predictable and ongoing revenue generated by subscription-based products or services.
• Provides a stable and consistent cash flow for long-term growth and sustainability.
• Often associated with subscription-based businesses like SaaS companies.

Non-Recurring Revenue:

• Generated through one-time payment and sales.
• Non-recurring revenue can come from one-time projects or engagements, such as consulting assignments for communication agencies or consulting firms.
• Less predictable and can fluctuate based on market demand or seasonal trends.

What is Annual recurring revenue? - (ARR)

ARR represents the total annualized revenue generated from all subscriptions. It provides a clear shot of a company's ongoing revenue stream.

It’s a crucial metric for assessing a company's financial health and growth potential, as it indicates the revenue expected to be earned over the next year.

How to calculate annual recurring revenue?

Here is the basic formula you’ll find online:

ARR = Number of customers x Average annual bills per customer.

Now, let's delve deeper.

Let's consider a software-as-a-service (SaaS) company that offers a range of subscription plans.

They have three options:

• Basic Plan: €500 per month per customer.
• Pro Plan: €1,000 per month per customer.
• Enterprise Plan: €2,500 per month per customer.

Additionally, they offer add-on services that generate extra revenue:

• Data Integration: €300 per month per customer.
• Advanced Analytics: €700 per month per customer.

Let's say the company has the following number of customers on each plan:

• Basic Plan: 50 customers.
• Pro Plan: 30 customers.
• Enterprise Plan: 20 customers.

And for the add-on services:

• Data Integration: 70 customers
• Advanced Analytics: 40 customers

To calculate the ARR, multiply the number of customers on each plan by the respective plan price:

• Basic Plan: €500 x 50 customers = €25,000.
• Pro Plan: €1,000 x 30 customers = €30,000.
• Enterprise Plan: €2,500 x 20 customers = €50,000.

Do the same for the add-on services:

• Data Integration: €300 x 70 customers = €21,000.
• Advanced Analytics: €700 x 40 customers = €28,000.

Add all these results together:

• €25,000 (Basic Plan) + €30,000 (Pro Plan) + €50,000 (Enterprise Plan) + €21,000 (Data Integration) + €28,000 (Advanced Analytics) = €154,000.

The ARR for this SaaS company would be €154,000 per year.

What is Monthly recurring revenue? - (MRR)

MRR is the total revenue a company expects to receive on a monthly basis from its subscribers.

Monitoring MRR allows businesses to track their revenue stream, identify trends, and make informed decisions about pricing and customer acquisition strategies.

How to calculate monthly recurring revenue?

The easy answer is:

MRR = number of customers x Average bills per customer and per month.

Let's look into the details with this example.

Imagine a sophisticated Software as a Service (SaaS) platform that offers a range of subscription plans tailored to different customer needs. The platform provides advanced analytics, data integration, and personalized reporting tools. Additionally, they offer premium support services for an extra fee.

Here are the details of the subscription plans:

• Basic Plan: €1,000 per month per customer.
• Pro Plan: €2,000 per month per customer.
• Enterprise Plan: €5,000 per month per customer.

They have add-on services:

Data Integration: €500 per month per customer.

• Advanced Analytics: €800 per month per customer.
• Premium Support: €1,500 per month per customer.

Now, let's consider the customer distribution:

• Basic Plan: 50 customers.
• Pro Plan: 30 customers.
• Enterprise Plan: 20 customers.

And for the add-on services:

• Data Integration: 60 customers.
• Advanced Analytics: 40 customers.
• Premium Support: 25 customers.

To calculate the MRR, calculate Subscription Revenue:

• Basic Plan: €1,000 x 50 customers = €50,000.
• Pro Plan: €2,000 x 30 customers = €60,000.
• Enterprise Plan: €5,000 x 20 customers = €100,000.

Add-on Service Revenue:

• Data Integration: €500 x 60 customers = €30,000
• Advanced Analytics: €800 x 40 customers = €32,000
• Premium Support: €1,500 x 25 customers = €37,500

Sum Up Monthly Revenues:

• €50,000 (Basic Plan) + €60,000 (Pro Plan) + €100,000 (Enterprise Plan) + €30,000 (Data Integration) + €32,000 (Advanced Analytics) + €37,500 (Premium Support) = €309,500

The MRR for this SaaS platform is €309,500 per month.

FAQ of the article

What is a good ARR and MRR?

A "good" ARR or MRR can vary widely depending on the industry, the stage of the company, and its specific business model.

However, generally speaking, a higher result is considered favorable as it indicates a healthier, more sustainable revenue stream.

If you’re looking for more understanding of your business evolution, you should also consider taking a look at a few other metrics:

• Customer Lifetime Value (CLV).
• Churn Rate.
• Customer Acquisition Cost (CAC).
• Customer Retention Rate.
• Gross Profit Margin.
• Customer Satisfaction (CSAT).

How to find a monthly recurring revenue calculator?

Here are two examples of online tools for calculating recurring revenue:

• Baremetrics
• ChartMogul

Both of these tools are designed to help businesses calculate their monthly recurring revenue based on the number of customers and the average recurring revenue per customer.

They offer a simple and easy-to-use interface that allows you to input your data and get an accurate calculation of your recurring revenue.

But, we recommend using an all-in-one recurring billing tool like Hyperline, which includes a dashboard with MRR, ARR, and other crucial financial metrics.

Hyperline offers features for automating billing, managing subscriptions, and gaining real-time insights into your business's financial performance.

Learn more about Hyperline.

What is the difference between annual run rate vs annual recurring revenue?

Annual Run Rate (ARR) is a metric used to calculate the projected revenue a company would generate in a year based on its current monthly revenue. It gives an idea of the company's future performance.

On the other hand, Annual Recurring Revenue is a metric used to represent the revenue a company expects to earn from its customers in the upcoming year based on existing subscriptions at a specific point in time. It provides insight into the company's current performance.