Using MRR To Improve Cash Flow
Generating revenue is crucial to the success of any business. In this post we will delve into the benefits and drawbacks of recurring revenue models and reveal how to use Monthly Recurring Revenue (MRR) to enhance your cash flow and business growth.
What Is Recurring Revenue And Non Recurring Revenue?
Recurring revenue refers to income that an organization generates at regular intervals from customers who have made a commitment to pay for a product or service for a specified period.
The most common form of recurring revenue is Monthly Recurring Revenue (MRR), which is the predictable, recurring revenue that a business can expect to receive on a monthly basis.
An example of a MRR business model is a subscription-based service such as Netflix, where customers pay a fixed amount every month to access their content.
Benefits To Recurring Revenue Models
1. It provides stability to an organization’s cash flow, which enables them to plan and invest in their operations with more certainty.
2. It creates a more predictable revenue stream that can be used for forecasting and budgeting.
3. It establishes a relationship with customers that can lead to greater loyalty and retention.
Drawbacks To Recurring Revenue Models
1. They require a significant investment in customer acquisition, retention, and support.
2. There may be limitations to growth as customers may not be willing to pay more for additional services.
3. Recurring revenue streams may be impacted by changes in the market or competition.
Recurring Revenue vs Re-Occuring Revenue
Re-occurring revenue, on the other hand, refers to income that an organisation generates from customers who may purchase products or services multiple times, but without the commitment of a recurring payment plan. For example, a customer who purchases a new pair of shoes from a store every six months is generating re-occurring revenue for that store.
One of the benefits of reoccurring revenue is that it allows for flexibility in pricing and product offerings, which can lead to more revenue streams. Additionally, it requires less investment in customer acquisition and support than recurring revenue models. However, it can also be less predictable and stable than recurring revenue models, as it relies on customers making repeat purchases.
How Do I Measure Recurring Revenue?
To measure recurring revenue, businesses typically use metrics such as MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), and LTV (Lifetime Value). MRR is the most commonly used metric that measures the predictable monthly revenue that a business can expect from its customers.
For re-occurring revenue, metrics such as customer retention rate, purchase frequency, and average order value (AOV) can be used to measure the effectiveness of the revenue stream.
Benchmarking Your Recurring Revenue
Benchmarking is a useful way for businesses to assess the effectiveness of their revenue models against industry standards. For recurring revenue, benchmarking can be done against other subscription-based businesses in the same industry to assess MRR growth rates and churn rates. For re-occurring revenue, benchmarking can be done against other businesses that rely on repeat purchases to assess customer retention rates and AOV.
Is Recurring Revenue The Same As Subscription Revenue?
Recurring revenue and subscription revenue are often used interchangeably, but they are not exactly the same thing. Recurring revenue is a broad term that encompasses all types of revenue that are generated at regular intervals from customers who have made a commitment to pay for a product or service for a specified period. This can include subscription revenue, as well as revenue from other recurring business models, such as leasing, rentals, and maintenance contracts.
Subscription revenue, on the other hand, is a specific type of recurring revenue that involves customers paying a regular fee for ongoing access to a product or service. Examples of subscription revenue include monthly or annual subscription fees for streaming services like Netflix or subscription-based software like Adobe Creative Cloud.
Improving MRR And Cash Flow
MRR is a powerful business model to create cash flow consistency and predictability.
Forecasting
One of the most significant benefits of MRR is that it provides a predictable revenue stream that can be used for business forecasting. By tracking MRR growth rates and churn rates, businesses can estimate their future cash flow and plan accordingly. This helps to avoid cash flow gaps and ensures that there are necessary funds to cover expenses.
Customer Retention
With the knowledge that future income will be recurring, business owners can turn their attention to reducing churn and improving customer retention rates which minimises dips in MRR and keeps cash flow strong.
Upselling And Cross-Selling
Upselling and cross-selling are effective strategies to increase MRR and improve cash flow. By identifying opportunities to offer additional products or services to existing customers, businesses can increase the average ticket of each customer and boost MRR and cash flow.
Diversification
Diversifying revenue streams is another effective way to improve MRR. By offering a range of products or services that appeal to different customer segments, businesses can reduce their reliance on any one revenue stream. This can help to minimise the impact of fluctuations in MRR and ensures a more stable cash flow.
Choosing the right revenue model for your business depends on the marketing you’re in and your business’ nature and objectives. As part of our business advisory services we can help you identify the right model and metrics to track in your business. Take a look at our array of services to see how we can assist you.
