Many people mix up re-occurring and recurring revenue, but one is much more valuable than the
Re-occurring revenue comes from customers that have a re-occurring need for whatever you sell
and buy from you on an unpredictable yet regular basis.
Imagine a health food store. Customers come in to replenish their supply of vitamins when they
run out. The owner is never quite sure when a customer will be back, but she’s pretty sure they
will return when they run low on a critical supplement.
Recurring revenue comes from sales to customers that buy from you on a predictable, automatic
cadence, for example, a subscription or service contract.
Let’s take the same health food store owner. She recognizes her customer comes in every month
or so to buy Vitamin C. She decides to offer a subscription for Vitamin C capsules, where she
ships a new bottle to her subscribers each month automatically. The customer doesn’t need to
make a dedicated trip to her store, and the owner automatically gets repeat sales.
Compared to one-off transaction revenue, both re-occurring and recurring revenue contribute
positively to your company’s value, but one is much more valuable than the other.
For example, Mike Malatesta created Advanced Waste Services (AWS), which helped
businesses dispose of their industrial waste. Energy giant Covanta (NYSE: CVA) saw acquiring
AWS as the perfect way to enter the industrial waste industry and sent Malatesta a Letter of
Intent to acquire AWS for $54.5 million.
Covanta liked that AWS had repeat business from loyal customers that they assumed were on
recurring contracts. However, when Covanta started their diligence before closing their
acquisition of AWS, they realized some of AWS’s revenue was re-occurring, not recurring, and
used that as justification to lower their offer by $4 million.
To convert re-occurring revenue into recurring revenue:
- Start by segmenting your customers that buy on a re-occurring basis.
- Look for a segment whose purchase cadence is relatively predictable.
- Design an offer for your regular, re-occurring customers that makes it more convenient
for them to buy on a subscription or service contract rather than on a transactional
- Aim to give re-occurring customers three compelling reasons to subscribe.
For example, in the case of the vitamin store owner, she could make the case that subscribing to
a regular shipment of vitamins is 1) more convenient for the customer because there is no need to
drive to the store, 2) more reliable because subscribers would be given priority on available
stock and 3) safer because vitamin subscribers would be given a newsletter describing new
clinical trial results of emerging vitamin therapies.
Re-occurring and recurring revenue may sound similar, but when it comes to your company’s
value, recurring revenue is far better. Consider converting your re-occurring customers into
subscribers, and you’ll build a more predictable—and valuable—business.