Unlocking the Power of Revenue Streams: Why New and Recurring Income Matter
Revenue is the lifeblood of any successful product development process. A robust revenue trajectory enables you to fund further product development and secure the desired profit for your business. However, not all revenue is created equal. Understanding the difference between new and recurring revenue is crucial for deriving essential insights and fine-tuning your projections.
The Two Faces of Revenue
Broadly speaking, there are two types of revenue: new and recurring. New revenue comes into play when a user transacts with you for the very first time. In subscription-based models, new revenue refers to a given user’s first subscription purchase. In transactional monetization models, it’s the first transaction made by a particular user. Recurring revenue, on the other hand, occurs when a user who has previously transacted with you does so again, whether through subscription renewal, plan upgrade, or purchasing another product from your e-commerce business.
Why the Distinction Matters
Differentiating between new and recurring revenue is critical for several reasons. It helps you understand the health of your sales funnel, design superior monetization strategies, and focus on relevant optimizations. For instance, if you have plenty of new revenue but lack recurring revenue, it indicates that your acquisition and activation channels are performing well, but you’re falling short in delivering promised value and retaining paying users. Conversely, if most of your income comes from recurring revenue, your acquisition efforts are lagging behind.
The Importance of New Income
New income is crucial because it eventually leads to recurring income. The more new income you generate today will translate into more recurring income tomorrow. This factor is critical since customers don’t stick around forever. They churn over time due to various reasons, and so does your recurring income. Think of generating new income as adding fuel to keep a fire burning.
The Importance of Recurring Revenue
The primary issue with new revenue is that customer acquisition costs tend to increase over time, which in turn raises the cost of generating that revenue. Recurring revenue, on the other hand, doesn’t involve new acquisition costs, making it cheaper and offering higher margins than new revenue.
Analyzing New vs. Recurring Revenue
Let’s examine two examples of how analyzing the split between these types of revenues can inform your strategy and aid in making better decisions. We’ll use a straightforward analysis method – a stacked bar chart – to illustrate the importance of distinguishing between types of revenue.
Example 1: A Deeper Look at Revenue Growth
At first glance, things look quite promising. Your revenues are growing by an average of 20 percent quarter over quarter. However, if you stop here, you might overlook valuable insights. Let’s analyze how much revenue came from brand-new versus recurring users. This chart paints an entirely different picture. Even though your total revenue is growing, most of it comes from recurring sources. These are benefits accrued from past sales. However, new sales are declining. This is a concerning signal.
Example 2: Uncovering Hidden Insights
Again, you create a bar chart to analyze your growth trajectory, and it looks promising. But let’s take a closer look at what’s happening beneath the surface. Here, we’ve identified another valuable insight: most of your growth in revenue comes from new sales. Even though there’s improvement overall, retaining that income over time seems problematic.
Segmenting for Deeper Insights
As with any analysis, segmentation is crucial to uncover more valuable insights. Let’s revisit the first example. Consider whether there’s a logical way to further segment this chart. Suppose you run a pet marketplace specializing in selling dogs and cats, and you generate revenue from commissions charged to sellers. In this case, it would make sense to separately analyze revenues from cat and dog sellers. Now we can clearly see that new revenue is declining overall, primarily due to a decrease in new revenue from dog sellers. New revenue from cat sellers, on the other hand, is steadily growing.
Conclusion
Not all revenue is created equal. New revenue helps boost your long-term income but comes with additional acquisition-related costs. On the flip side, recurring revenue is cheaper (thus offering higher profitability), but as users churn over time, so does this type of income. Ideally, you should aim to grow both new and recurring revenues simultaneously to maintain a healthy long-term trajectory. Use the split between new and recurring revenues in your analysis to gain high-level insights into potential areas of deficiency. Segment it by various use cases to yield more insights that can inform your strategy and roadmap as you optimize your mix of revenues. Unsegmented, general revenue figures only tell part of the story.