What is recurring revenue, and how does a Customer Success team calculate it? Let’s review this straight-forward calculation and how to track it for a direct impact to your SaaS business’ growth and success.
What is recurring revenue?
Recurring revenue is the revenue your company will likely continue receiving from customers in the future. As a subscription business, software and services that are renewed by customers should count as recurring.
How do you calculate recurring revenue?
You can calculate recurring revenue annually (annual recurring revenue) or monthly (monthly recurring revenue). Keep in mind that you are aggregating new and existing customers’ recurring costs, and leaving out one-time costs that may appear throughout the year (example: implementation fee or support with a database migration).
A quick look at monthly recurring revenue (MRR)
It’s October and your company has three customers. They all started in different months. Two customers paid for a full year up front, while one customer pays on a monthly subscription schedule. Calculate only what the payments would be if all three customers paid an equivalent portion for that month:
Customer 1:
- Joined in January, paid $12,000 for the full year
- October MRR: $1,000
Customer 2:
- Joined in August, paid monthly rate of $1,000 for August and September
- October MRR: $1,000
Customer 3:
- Joined in March, paid $24,000 for the full year
- October MRR: $2,000
October MRR total: $4,000
For a deeper dive, check out our page on monthly recurring revenue.
Quick look at annual recurring revenue (ARR)
Your company’s ARR is simply your monthly recurring revenue (MRR) multiplied by 12 (months). Let’s use Customer 2 from our MRR example here. They pay $1,000 per month on a 12-month contract. Their ARR is $12,000.
Read more on our page about annual recurring revenue.
Why recurring revenue matters
Revenue is a top priority for your company’s board, investors, and overall financial well-being. And recurring revenue is the most straight-forward way to track that health, as well as analyze performance trends and business goals.
Here are some examples of how you can leverage recurring revenue as a metric for success:
- New contracts growth and measurement
- Net and gross expansion and contraction from existing customers
- ASP (average selling price) trends (universal, per sales rep, etc.)
- Revenue forecasting
- Cohorts (i.e. customer start month, quarter, year) and customer relationship-building
Additional resources related to recurring revenue
- Webinar: SaaS retention benchmarks: How does your company compare? – with Rob Belcher, managing director at SaaS Capital
- Blog: Everything You Need to Know About Recurring Revenue
- Blog: 20 quick insights on Customer Success and SaaS metrics with Dave Kellogg, Dave Kellogg Consulting
- Blog: Key SaaS and Customer Success metrics you should care about with You Mon Tsang, CEO, ChurnZero and Dave Kellogg, Dave Kellogg Consulting
- Blog: 6 Benefits of the Recurring Revenue Model That You Really Need to Know About,
Back to the Churnopedia: SaaS Terms and Metrics