Updated: Aug 27, 2021
It's black and white: there’s recurring revenue and non-recurring revenue, right?
Wrong! As with most things in life there are shades of grey and in the world of revenue this is repeating revenue.
At Fordhouse, we think of recurring revenue as revenue that a) automatically happens without any intervention from the customer; and b) supports the ongoing provision of a product or service. The time period could be anything from a monthly rolling to a multi-year agreement. Examples include Microsoft 365 licensing (monthly rolling) and a leased internet line (5 years contract, paid monthly or quarterly).
Non-recurring revenue is one-off revenue. Typically it requires the customer to proactively request/approve each instance and whether that revenue will reoccur or not is at best unknown, but most often it is unlikely to. Examples include project work such the implementation of a new system or the purchase of 5 new laptops.
So where does repeating revenue come into play?
Well, let’s take the example of the 5 laptops purchase, which is a non-recurring event. The customer is an organisation that has an IT policy to refresh its laptops once they are 3 years old. They’ve got 180 laptops (they bought 60 each year, 5 each month, every month) and so the refresh rate will be 5 laptops a month, every month. This is non-recurring revenue, but we know with very high confidence that the revenue (from 5 laptop purchases) will happen each month. So we can class this as repeating revenue. Not truly recurring revenue, but better than one-off revenue.
If a business is 50% recurring and 50% non-recurring, but half of that non-recurring can be classed as repeating revenue, then a buyer of that business can have high confidence that 75% of the revenue will reoccur vs the 50% original view. That will make the business a hell of a lot more valuable to a buyer.