How to create new avenues for predictable revenue and cash flow. 

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Netflix, Spotify, and even YouTube are all brands that earn millions with recurring revenue (RR)—but you don’t have to be one of the world’s leading streaming services to make a success of it.

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You’d be hard-pressed to find a successful company right now that doesn’t offer some kind of monthly subscription or yearly membership. 

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Subscription-based services bring several lucrative advantages to all businesses by building customer retention that helps build a revenue safety net.

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However, you may come up against a few challenges should you attempt to create your own recurring revenue model, including:

• Choosing a suitable subscription model for your business type.
• Calculating different revenue streams, like MRR and ARR.
• Finding a suitable monthly or annual recurring payment method.

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Despite these difficulties, a recurring revenue model (done well) will still add buckets of value for many businesses. 

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After all, why rely on one-time sales, when you can diversify revenue streams and take advantage of recurring payments? 

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If you’re interested in starting a subscription business, first, you’ll need to understand the following:

• What is a recurring revenue model?
• Different types of recurring revenue for businesses
• Why are recurring revenue models beneficial?
• Can recurring revenue models put a strain on your business?
• How to calculate recurring revenue
• Simplify recurring revenue management with Kem’s instant payments

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[Keep payments simple with Kem. The all-digital, instant cash app that makes sending and requesting as easy as ’tap’. Start using the Kem app for your business today, download it for free on Google Play and Apple] 

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What is a recurring revenue model?

Recurring revenue, sometimes referred to as subscription revenue, refers to a business model that repeatedly charges its customers for a product or service. This can be through monthly or annually scheduled payments, creating a stable cash flow for businesses. 

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How an RR model can build lifetime value from customers

Source: Paddle

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Here is what sets a recurring revenue model apart from the one-time sales approach:

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• It charges customers at regular intervals.
• It has a greater ability to forecast revenue.

It provides the customer with a consistent value that justifies the subscription fee.

• Subscriptions or memberships automatically renew, saving time with payment processing.
• It allows you to focus on retaining or upselling the existing customer base.

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Examples of recurring revenue 

Both small and large businesses can use a recurring revenue business model. 

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Some everyday examples include cafes that have monthly coffee subscription boxes for aficionados or a social club membership that gives you exclusive access to monthly events and discounted goods.

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One popular recurring revenue model you may be familiar with is a software-as-a-service (SaaS) platform. Think of office tools like Zoom or Microsoft Excel, which you pay a recurring license for. 

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While companies like Microsoft once relied on one-off sales through CDs, the digital-first landscape allowed them to seamlessly switch to a model of recurring revenue streams.

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Recurring revenue business models come in all shapes and sizes but can be one of the most profitable business ideas in Kuwait today when done well. 

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What's the difference between recurring revenue and profit?

Don’t get your recurring revenue mixed up with profits. 

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Recurring revenue refers to the income from regular customer payments. 

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Profits, on the other hand, refer to the money remaining after you’ve deducted all your expenses from your recurring revenue.

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Different types of recurring revenue models

Businesses are spoilt for choice when choosing RR models. 

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The good news is you aren't limited to just executing one, you can apply different models for different angles of your business.

The connecting thread between them is their ability to help you manage your customer’s satisfaction. Many industry experts vouch for the success of subscription models because a happy customer makes for a loyal customer. Building that long-term relationship comes back tenfold. 

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Tien Tzuo, Founder of Zuoro, put it best, “Subscriptions are the only business model that is entirely based on the happiness of your customers. Think about it—when your customers are happy, then they’re using more of your service, and telling their friends, and you’re growing.”

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“Subscriptions are the only business model that is entirely based on the happiness of your customers. Think about it—when your customers are happy, then they’re using more of your service, and telling their friends, and you’re growing. ― Tien Tzuo, Founder of Zuoro

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Here are some of the most popular and common recurring business models currently being used worldwide.

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Subscription

A basic subscription model charges customers at set intervals, leasing a product or service to them during that time. 

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Some famous companies that use this business model include Amazon with its Prime Subscription. Customers pay a small premium to save on shipping costs, which unlocks next-day (or even same-day) shipping.

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Membership

Like subscriptions, the membership model involves a recurring fee to receive a benefit, service, or product. The difference is that there is usually a community-building aspect involved. 

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For example, a coworking space like WeWork offers different tiers of membership. The higher your membership status, the more perks you unlock—for example, access to exclusive community events or complimentary meeting room access.

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Pay-as-you-go

Also referred to as the usage-based model, pay-as-you-go does what it says on the tin. Customers pay for how much they use a service or product. 

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This subscription format is largely used by cloud computing or telecommunication companies. Take, for example, Ooredoo, which offers a pay-as-you-go sim card. This allows customers to buy into their network and recharge their sim based on their usage.

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Freemium

The freemium model uses a clever approach to upsell users and convert them into a paying customer base. You may have come across a product or service like this before, where you are prompted to unlock certain paid features to get the full experience. 

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LinkedIn is a prime example of this, offering a free tool for job hunting and networking. Yet, only through their paid plans can you access greater job insights, more advanced searches, and the ability to use InMails. 

Retainer

A retainer model is largely used by those providing professional services, like law firms, advertising agencies, or IT consultants. 

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By charging clients monthly, they guarantee to dedicate an agreed number of hours to provide a service. For example, a small business might hire an accountant on retainer to help with bookkeeping and taxes. Every month they’ll pay a recurring fee to continue the partnership.

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License

Most often used by software-as-a-service (SaaS) companies, the license model grants customers access to a service for a recurring fee.

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Notable brands that follow this format include Adobe, with its suite of office tools, and IBM, with its analytical tools and databases.

Each of the six models belongs to the growing world of digital payments that small businesses should know about when building a subscription-based revenue stream. 

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Why are recurring revenue models beneficial?

You might be wondering why it feels like every company wants you to buy into their subscription model. They do, and it’s because the recurring revenue model comes with plenty of benefits for businesses. 

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Here’s what gives subscription-based companies the edge over those using the one-off sales model:

Consistent cash flow & forecasting

A steady stream of revenue goes a long way in ensuring a business has its financial health in check. 

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Along with that, recurring revenue models give you a far more insightful and accurate outlook on your business's financial state. Predictable revenue isn’t just good for peace of mind, it allows you to strategize better when it comes to managing internal expenses and budgeting for expansions. 

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Cultivate customer loyalty

Customer retention is something all businesses, no matter their model, have to contend with. 

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With recurring models, the process becomes slightly easier as you shift your focus to customer retention and providing lifetime value. 

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Building a good customer relationship within your recurring model has its benefits. One study by BIA Advisory shows that returning customers spend 67 percent more than new customers.

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Investing in the customer experience at every touch point is a priority for recurring revenue business models.

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Scalability

The desire to scale a business is inevitable. 

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Models like monthly subscriptions are considered highly scalable, particularly if they are in the sales-as-a-service (SaaS) space where the primary offering can remain the same while new customers roll in.

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Tools that support your revenue model can also help you grow. A loyalty program that rewards your customers with rewards for a long-term subscription, for example, is one of several fintech trends that are helping businesses grow in the GCC. 

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Cross-selling and upselling

Subscription-based services are a hotbed for cross-selling and upselling! 

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Customer loyalty has already been established, so adopting upgrades feels like a natural progression for users. 

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This is an easy and cost-effective strategy to improve your monthly recurring revenue.

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Increased business worth

Predictability is safe and less volatile. 

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With recurring revenue models, there’s less room for unforeseen irregularities to crop up. That’s a big bonus if you ever decide to shop around for investors to scale your company.

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Can recurring revenue models put a strain on your business?

It’s not all rainbows and butterflies. Like with any business model, there’s work to be done when you set up an RR model.

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Here’s some food for thought when it comes to potential drawbacks that can occur with recurring revenue pricing models. You’ve probably noticed it: there’s a high market saturation.

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Recurring revenue models are a dime a dozen these days, and some people are sick and tired of their subscriptions. When adopting this model, it’s important to ensure you are truly adding great value to your target customer base. 

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As Rachel Rouhana, founder of Haute Stock puts it, “The best membership sites solve a specific problem for a specific group of people. If you want to build a successful site, you have to narrow your niche and effectively communicate who your membership is—and isn’t—for¨

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Beyond that, you’ll have to contend with customer churn. The phrase refers to losing customers. Of course, every company deals with the threat of high churn rates. Combating this relies on cultivating strong customer relationships and ensuring you have a good gauge of customer lifetime value.

One way to keep customers on your side is by using an easy, instant payment solution. Ensuring your business shines and payments go off without a hitch. With Kem, for example, you skip all the fuss of payment links, IBANs, and transfer forms.

“The best membership sites solve a specific problem for a specific group of people. If you want to build a successful site, you have to narrow your niche and effectively communicate who your membership is—and isn’t—for.¨ -- Rachel Rouhana, founder of Haute Stock

How to calculate recurring revenue

Like with any part of your business, it’s important to have a good overview of how things are progressing. 

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That’s why you’ll want to calculate your monthly recurring revenue (MRR) and annual recurring revenue (ARR). Both metrics give you a solid means to track growth trends and forecast the months ahead.

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It’s important to note that your monthly recurring revenue (MRR) and annual recurring revenue (ARR) are not accounting figures. But a clear way to see how your business is advancing. While this figure may not be relevant to your accountant, it would be of interest to investors.

Monthly recurring revenue (MRR) formula

To  calculate your monthly recurring revenue (MRR), you need to multiply the number of your monthly subscribers by your average revenue per user (ARPU):

MRR = total number of monthly subscribers x ARPU

In this case, if you had 45 subscribers, each paying 14KD, your monthly recurring revenue (MRR) would be 630KD.

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To get your average revenue per user (ARPU), simply divide the sum of your recurring revenue for a given month, by the active users for the same month:

ARPU = Revenue within selected time period / Active users within selected time period

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While that may seem straightforward enough, don’t put your calculator away just yet! As business fluctuates, you’ll want a more in-depth understanding of the trends. Particularly with customer acquisitions, retention, and engagement. 

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From one month to another, these important metrics will show you where you have gained or lost recurring revenue.

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New MRR

This formula helps demonstrate the new recurring revenue brought in by new customers who have just started a subscription within a given month:

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New MRR = number of new subscribers x ARPU

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Expansion MRR

This equation allows you to see how many existing customers opted in for upgrades or added to their subscription model:

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Expansion MRR = number of subscribers who have upgraded x (new ARPU - old ARPU)

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Contraction MRR

By using the contraction MRR, you’ll gain a metric of customers who have downgraded their subscriptions to a lower tier. This formula gives you a metric of lost recurring revenue for customers you still retain, but now bring in less revenue:

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Contraction MRR = number of customers who have downgraded  x (new ARPU - old ARPU)

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Churned MRR

The churned MRR formula gives insight into your existing customer base who have now canceled their subscription entirely. This formula gives you a metric of lost recurring revenue for former customers:

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Churned MRR = number of lost subscribers x negative ARPU

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Reactivation MRR

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Calculating your reactivation MRR allows you to see how existing customers, who may have paused or deactivated their subscriptions, have reactivated them again. Giving you a metric of regained recurring revenue:

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Reactivation MRR = number of customers who have reactivated x ARPU

Net New MRR
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With this calculation, you get a full picture of the different changes happening within your recurring revenue, accounting for all the above:

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Net New MRR = New MRR + Expansion MRR - Churn MRR - Contraction MRR

Source: Actiondesk

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So, simply looking at monthly recurring revenue (MRR) doesn’t paint the full picture. By analyzing each individual MRR metric along with your Net New MRR, you can pinpoint growth along with potential room for improvement.

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For example, if you see a trend of high contraction MRR over several months despite new MRR trending upwards, that’s an indication you need to work on your customer retention. 

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Annual recurring revenue (ARR) formula

Figuring out your ARR, or annual recurring revenue calculation, is easy. As you may have guessed, it’s as simple as multiplying your MRR by 12, for every month in the year:

ARR = MRR x 12

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Therefore, if your monthly recurring revenue (MRR) is 630KD, multiply that by 12, and your annual recurring revenue calculation is 7,560KD.

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Simplify recurring revenue management with Kem’s instant payments

When executing subscription models, the billing experience is everything. 

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Accidentally charging your customers too much or too little can sour the experience. Not to mention cause havoc to your cash flow. 

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Partnering with the right payment solution will prevent billing hiccups down the road. 

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Kem’s thoughtfully built payment app balances the need for simple, instant payments with a comprehensive suite of tools that businesses can rely on. 

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With the scan of a QR code, it’s easy to:

• Send a payment request to anyone.
• Tap and pay with one click.
• Unlock fast and secure transactions.
• Transfer funds to your bank account anywhere, anytime.
• Easily track incoming and outgoing transactions.
• Keep costs to a minimum with no hidden fees or minimum balance required.

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A good payment service should be like electricity at home: working on demand and instantly.

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That's the energy that Kem brings. You pay in an instant, then pay it no mind at all. Billing customers for monthly subscriptions or annually scheduled payments couldn’t be easier.

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[Need a foolproof payment system for your new business? Kem makes it easy to spend, send, and request with a click of a button. With built-in business features to help you keep track of cash flow. ​​Download the Kem app for free on Google Play and Apple today!]