Recurring and reoccurring revenue streams may seem like interchangeable terms, but far from it. These are two distinct forms of revenue streams and they impact your business cash flow differently.
Recurring revenue is any revenue generated on a regular and ongoing basis, such as a monthly subscription; while reoccurring revenue comes from returning buyers but occasionally.
Keyword here is “regular.”
Let’s look at it this way.
You probably pay a fixed amount to Netflix every month as subscription. In that case, Netflix knows how much revenue they expect to generate from you monthly. It’s regular, predictable. Netflix makes recurring revenue.
But maybe you have a fashion brand and a customer who buys clothes from you now and then. However, you can’t say for certain when they’ll return, or how much they’ll spend next. It’s irregular, unpredictable. This is reoccurring revenue.
While every business cannot be fully based on a subscription model, I typically advocate for businesses to have some sort of recurring revenue. Why, because it takes the pressure off meeting your business’s monthly expenses since you can predict how much money you’d make that month.
Here are specific reasons to adopt a recurring revenue business model
Predictable cash flow
Like recurring decimals back in 7th grade, you always know when and where the numbers will appear. And since you can predict your cash flow, you can better plan toward future investments and expenses, and there’s less anxiety surrounding your finances.
Recurring revenue model reduces churn
Churn rate is the rate at which customers stop buying from you.
Let’s face it; once you’ve subscribed to Netflix or some SaaS product, don’t you just automatically feel committed and even too lazy to find another alternative? It’s easier to just stick with them and let the payment renew.
With a recurring revenue model, customers are less likely to leave your business, as opposed to when they can just buy from you today and try your competition the next day.
Greater customer lifetime value
Customer lifetime value (CLV) is a measure of the total financial value a customer brings to a business throughout the duration of the relationship. A customer who’s likely to make more repeat purchases and spend more has a higher CLV than another who only makes a one-off purchase.
Recurring revenue models can increase customer lifetime value by encouraging customers to use your product/service for a longer period.
Lower customer acquisition costs
Ever calculated how much you spend to acquire a new customer? Now imagine if you had to spend on ads every time you want to make a sale because you don’t expect old customers to return.
With a recurring revenue model, you don’t always have to spend on customer acquisition because existing customers continue pumping dollars into your account while you lounge cross-legged in your backyard.
Better scalability
Recurring revenue models allow you to scale without having to increase your customer base. For example, you can simply increase your subscription fees. In contrast, you would have to do more marketing, expand your business, and acquire more customers if you’re fully dependent on reoccurring revenue.
Now here’s a question I perceive you’re already asking: What if I’m a product-based business such as a cosmetic or fashion brand, how can I generate recurring revenue like Netflix or HubSpot?
Well, there are many methods. For starters, you can start a subscription service, such as delivering subscription boxes monthly. Referrals and loyalty programs are also excellent ways to keep existing customers committed to your brand.
