Unlike one-off sales, recurring revenue is predictable and expected to continue in the future. This makes it easier to analyze and improve over time because trends will be clearly visible as long as you’re measuring them.
You can use the findings from analyzing your recurring revenue to adjust your business strategies, improve your financial performance and elevate the way you serve your customers.
What to Look for When Monitoring Recurring Revenue
To start analyzing your company’s recurring revenue, look at it from the simplest, highest-level perspective possible. In other words, look at how your recurring revenue performance is trending at the company-wide level.
“You could measure company-wide recurring revenue in terms of MRR or ARR, but ultimately, you need just some kind of trend line measuring how much recurring revenue you have,” says Mike Redbord, the Head of Operations at SaaSWorks. “Is that line going up and to the right, down to the right or flat?”
After establishing and measuring a trend line for your company-wide recurring revenue, dig deeper into what’s causing your recurring revenue to trend the way it is.
“In any recurring revenue business, you have puts and takes of places where you are growing your revenue run rate and places where your revenue run rate is decreasing,” Mike says. “There are all these additions and removals of recurring revenue over time.”
So, you want to break your overall trend line into its constituent components:
“It’s very unlikely that those four revenue streams will be contributing equally to the overall progress of the business,” Mike says. “If your net recurring revenue is flat, maybe your new revenue is going great but your cancellation is doing really poorly. Or, maybe your business is growing really well, but underneath the surface, your downgrades are getting worse and could over time pose a headwind.”
Knowing which revenue stream you should focus on will require some baselines and goals based on your business model and customer base. Some companies experience high churn rates because they serve a volatile market. Others might have very low upgrades because their product doesn’t have very many upgrade paths.
“Each revenue stream has its own levers and its own coefficients of friction,” Mike says. “It might be harder for you to improve cancellations than it is for you to improve upgrades.”
Once you know how you want each revenue stream to perform, then you can identify where to focus your efforts based on which area is the furthest from your goal and where it’s easiest to make an impact.
Cancellation Revenue Stream
To analyze your cancellation revenue stream, you’ll want to break it into subcategories just as you divided up your net revenue. You should examine the data through the lenses of time, segment and lifetime length.
When examining cancellations by time, look at how your revenue performed each month and identify any outliers or months that marked the start of a change. What happened in those months? Are there seasonal trends related to the industry you’re in? Did you make a change to your product? Was there a global event?
“You need to break apart who canceled at which time. What are the key segments? What’s the nature of those customers? Why did they cancel?” Mike says. “People cancel for all sorts of reasons. Did they stop finding value in your product? Did their contract go up? Did you change the payment method? Did they forget to pay?”
Another way to monitor cancellation revenue is through the lens of ideal customer profiles (ICPs) and product segments. Are all your cancellations coming from the same ICP, indicating a fit issue with that type of customer? Are cancellations spread evenly across all your products, or are they localized to just one?
Thirdly, you should analyze your cancellation revenue by cohort. Where in their lifecycle were the customers who canceled? Are they concentrated around a particular milestone, like a renewal? Are they evenly distributed across all lifecycle stages, indicating the problem is likely more holistic, like a billing or collection issue?
Acquisition Revenue Stream
If you’re focusing on your acquisition revenue, your overarching questions are “What’s causing growth?” and “What’s not growing so well?”.
“If your acquisition has been growing healthily, what segments is it coming from? Can you tie that back to certain efforts that you made there? Did you go to a bunch of healthcare trade shows and now you’re acquiring a bunch of healthcare customers? Did you do a bunch of paid search campaigns promoting a new product and now that product is selling really well?” Mike says. “Similarly, if it’s going down, what industries, products or other factors are driving that acquisition number in that direction?”
Segment your acquisition data by ICP, industry and product line, identify commonalities and then dig into what might be causing those occurrences.
Upgrade and Downgrade Revenue Streams
When monitoring upgrade and downgrade revenue, you’ll be asking a mix of the questions you use for acquisitions and cancelations.
You should segment your data by ICP and product line and identify where upgrades and downgrades are occurring.
You should also conduct a cohort analysis to determine where in the customer lifecycle upgrades and downgrades are happening. Are they localized around renewals or happening mid-lifecycle? Do these occurrences align with your customer marketing and upsell efforts?
Additionally, you need to look at how upgrades and downgrades relate to each other.
“Upgrades and downgrades often have a relationship to each other,” Mike says. “So, you’ll see a customer have a really big upgrade in February and then a big downgrade in March. You can have stuff that’s out of whack in terms of your product, pricing or sales incentives that caused that behavior.”
“Monitoring recurring revenue is a mining operation,” Mike says. “You start with dynamite, then you get in there and get out your pickaxe. Then you get out your chisel. After the chisel comes the dremel. Then you finally get the diamond or the gold, and you buff it with a little brush. It’s about getting more and more detailed until you get to the nugget of truth.”
While this can seem overwhelming to start, once you get in the habit of monitoring your revenue this way, it’s quite manageable as long as you do it on a regular basis. There will only be a couple of things you need to address each month, and the more historical data you have, the easier it will be to identify trends.
Quinn is a Content Marketing Strategist at New Breed who writes and edits inbound content that informs audiences. She’s super passionate about grammar and punctuation and loves learning new things that she can share with readers. Her favorite punctuation mark is the em dash.