How to Measure Net Recurring Revenue
Net Recurring Revenue is a comprehensive indicator that reveals the extent to which you are retaining, expanding, and growing customer relationship value. Examining the specific underlying elements that contribute to the calculation of Net Recurring Revenue provides necessary insights to identify the root causes of churn, attrition, and contraction.
Net Recurring Revenue Defined
Net Recurring Revenue measures the additions and losses to recurring revenue over a specified period. Net Recurring Revenue Rate indicates if the overall value of customer relationships is expanding or contracting. Knowing how to measure Net Recurring Revenue, you can obtain a clear indication of the performance and impact of service offers, products, programs, and customer-focused policies and practices.
How to Measure Net Recurring Revenue
To calculate the Net Recurring Revenue Rate, you need to know how much recurring revenue is added and lost within a period. While you can calculate Net Recurring Revenue Rate by knowing the aggregate recurring revenue you add and lose within a period, it is ideal to have as much granularity as possible.
Recurring Revenue Measurement Period
Net Recurring Revenue is a time-based measurement. Choose a period such as a month, quarter, or year. The shorter the period the more likely you are to see variations from period to period due to time-based market factors and customer behaviors. Measurement over longer periods will provide a more accurate reflection of the actual trajectory of recurring revenue performance.
Existing Recurring Revenue
Start with your Existing Recurring Revenue (Existing RR) at the start of a period. This includes any sources of revenue that are renewable at the end of a term including product and service subscriptions. This does not include one-time purchases and license fees.
Recurring Revenue Lost
Subtract Recurring Revenue Lost (RR Lost) during that period. This includes subscriptions that are canceled or non-renewed (lost) and subscriptions that are reduced in total value (contraction).
Recurring Revenue Added
Add Recurring Revenue Added (RR Added). This will include any new sources of recurring (additions) or expansion of the value of existing recurring revenue relationships.
See the formula below.
The Meaning of Net Recurring Revenue
Measuring Net Recurring Revenue provides a clear indication about the extent to which recurring revenue is growing or declining. The more important insights from this metric come by examining the reasons for growth or contraction of Recurring Revenue. Consider the following when examining Net Recurring Revenue:
- What is the trend in Net Recurring Revenue – growth or contraction?
- What is the rate of rate of change in growth / contraction?
- What are the primary reasons for loss of recurring revenue – loss of customers or contraction or exiting of relationships?
- What are the primary factors that contribute to revenue gains – new relationships or expansion of existing relationships?
The type and magnitude of changes to Net Recurring Revenue Rate can provide important insights into the reasons for changes to the value of customer relationships. Use these insights to develop strategies to stem customer churn and reduction of contract value. Build upon practices and circumstances that lead to new customer engagement and growth of existing relationships.
The amount of recurring revenue a company receives may increase, stay the same, or decline for a given period. Recurring Revenue Rate indicates the percent change in the amount of recurring revenue at the end of a specified period compared to the recurring revenue at the beginning of the same period. Measuring recurring revenue rate is essential to help identify the factors that lead to revenue retention and attrition and provides an indicator of the overall state of customer relationship health.
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