Generating a steady revenue stream is key for any business. In the home service industry, offering regular services is common practice. But how can you capitalize on this to ensure recurring revenue is a constant? We’re glad you asked.
What is recurring revenue?
Recurring revenue is income that a business reliably receives from clients. It’s generated when you schedule repeat business with a client. Unlike one-off or non recurring revenue, these repeat services improve your cash flow and increase revenue from existing customers.
A recurring revenue business is common in the home service industry:
- Lawn care companies that offer weekly mowing services
- Cleaning businesses offering biweekly residential cleaning
- Pest control companies that set rodent traps quarterly
- HVAC companies that do seasonal maintenance and filter changes
What is annual recurring revenue?
Annual recurring revenue (ARR) is income you receive or generate every year.
This income is received when a contract is renewed. For example, if a client renews their services every April, you’ll receive payment that month. Some companies organize annual contracts to renew every January or at the start of a fiscal year. Renewal dates will depend on your specific business model.
What is monthly recurring revenue?
Monthly recurring revenue (MRR) is income you receive or generate on a monthly basis. Offering clients frequent services like residential cleaning easily generates MRR.
It’s common to bill monthly on the first of the month. This lets businesses budget for recurring billing and payment processing. Relying on monthly payments guarantees repeat purchases from customers and opportunities to upsell.
How to calculate recurring revenue
Knowing your recurring revenue helps with financial operations. There are different methods and formulas for MRR and ARR.
How to calculate MRR
Calculating your MRR is simple. A popular formula is:
MRR = (total number of active clients) x (average monthly revenue per client)
Your MRR will change month-to-month with customer churn (the percentage of customers you lose during a specific period) and upselling. Knowing what to expect on average will help you forecast. If there’s a significant dip in MRR, figure out why.
How to calculate ARR
If you already know your MRR, calculating your ARR is straightforward. You can use this formula:
ARR = (monthly recurring revenue) x 12
However, you should account for customer churn and cancellations as needed. If you do, a more accurate formula to use is:
ARR = (monthly recurring revenue x 12) – (total amount lost from cancellations)
Some businesses also add their expansion revenue to their ARR calculations every year. Doing this will depend on your specific business model.
Why is recurring revenue important?
Generating recurring revenue is important because it allows your business to thrive. Without it, you wouldn’t know when your next paycheck would be. But that’s not the only reason you should care about it:
Creates customer retention
Recurring customers are key to generating ongoing revenue. Build long-term relationships where possible so you can rely on ongoing contracts. For example, a seasonal lawn maintenance contract generates more income than a one-off job.
This customer lifetime value contributes to your bottom line. Keep these clients happy and show that they can trust your work. Offering different price strategies helps with customer satisfaction.
If you have a good working relationship, ask them to leave a positive review online. This boosts future business and shows potential clients that others trust your work, so they’re more likely to hire you.
Gives insights into business performance
Want to know how well your business is doing? Calculate and monitor your recurring revenue.
Analyzing this data will show how well (or not) you’re performing. You’ll spot opportunities for growth, especially in slower months. Pay attention to these details. If churn is high in the summer, ask why.
These details can be intimidating and maybe a little boring, but it’s vital. Knowing your churn rate lets you address problems. Target marketing to fill service gaps. Customer acquisition is important, and customer retention boosts business.
READ MORE: Key business metrics you should be tracking
Reliable cash flow and stability
Everyone wants to get paid. Without a reliable income stream, business suffers. Business stability is key.
When you can predict how much you’ll be paid every month, it’s easy to maintain and grow your business. Balancing books becomes a breeze, and planning for the future is less stressful.
A predictable cash flow reduces risk, such as fluctuations in seasonal demand. Stability means you can focus on marketing efforts, expansion, and general operations.
READ MORE: Learn how to improve cash flow
How to build a recurring revenue model
If you’re not already generating recurring revenue, it’s time to start. Here are three ways to get you started:
1. Send clients itemized quotes
Always send clients itemized quotes and include good, better, best pricing options. Show the cost difference for weekly, monthly, or annual services. These small changes to your quotes are an easy way to upsell.
2. Conduct follow-ups
Following up with your customer base may seem tedious, but it’s worth it. If you serviced them last winter, contact them again before the upcoming season. Remind previous clients about your packages and prices, and ask if they’d like a quote.
This is an easy way to generate a quarterly or annual recurring revenue stream.
READ MORE: Get help with your customer service follow up emails
3. Send marketing emails
Email marketing campaigns are an effective way to communicate. Build email lists of past clients so you can stay in contact.
Send email campaigns before your busy season begins to book clients in advance. Let people know when you diversify services or expand your service area. Are you offering a discount or referral program? Email that out, too!
READ MORE: Small business email marketing tips