ReCurring vs ReOcurring Revenue: What's the Diff (A Lot)
Gauging predictability in your revenue
As a tech CFO, pricing is one of the most difficult undertakings I’ve personally wrestled with.
The journey to price optimization is complex, but you don't have to navigate it alone.
BlueRocket's pricing experts have all operated companies before. And they’ve used that hands-on experience to help companies like Salesforce, Gitlab, Brex, Zendesk, and Google optimize their pricing.
Readers of this newsletter get a pricing conversation with BlueRocket’s CEO Jason Kap.
Remember in sixth grade when you’d write an essay and start with “Webster’s dictionary defines the word Adversity as…” launches into subpar essay on Catcher in the Rye…
Those were always the worst intros. Anytime someone makes an entrance by dusting off the old dictionary, you know you’re in for a snooze fest.
I’m going to tread near that insufferable line here, in an attempt to better understand the nuances in SaaS models, where customers pay an annuity of some sort, in exchange for access to your product.
In the advent of usage based models, there’s been some Tom Foolery going on when it comes to reliably claiming what truly is “Annual Recurring Revenue”. It’s the Wild West - especially on Twitter - where we’ve got everyone and their mother claiming that their dog sitting business or google Chrome plugin store is recurring in nature.
ReCurring: Something happens over and over again, at regular intervals, at the same amount, for a defined period of time.
ReOccuring: Something happens more than once, but not always repeatedly, and not always at the same amount, nor over a defined period of time.
Both happen more than once. But the former is more predictable, and dependable, compared to the later. Let’s translate it to revenue and make it more real:
ReCurring revenue: Revenue that is generated regularly, such as through subscriptions, contracts, or membership fees, at the same predictable amount.
ReOccurring revenue: Revenue that is generated from repeat customers or purchases, even if they are not on a regular schedule.
Speaking of that - Marshaun Lynch loves Recurring revenue, because it happens over, and over, and over, and over, and over, and over, and over again with the same sustained force.
The Issue
A lot of early stage CFOs try to prove repeatability in their business by jamming ReOccuring into their ReCurring number and hope you don’t see the difference between the two.
There is a difference between:
“This customer buys the same amount each month from us, and we are pretty sure they will continue to”
Not as ideal…
Versus…
“This customer has a contract where they have to buy from us each month for the next two years, and on top of that, they use the product above and beyond this contract in this very predictable way.”
ReCurring is the stable foundation. ReOccuring is the added upside.
In other words, ReOcurring sits on top of ReCurring in a hybrid subscription + usage model.
Why Investors Care
At the risk of being too basic, a typical SaaS business charges you the same amount each month - regardless of the number of days in a month or your product usage. This de-risks performance, and therefore valuation, to a degree.
That’s what scares people away - when you try to jam something into the ReCurring bucket that isn’t ReCurring, it may go away with seasonality or big deal risk.
Ultimately you can define it however you can convince people these things.
CFO of Gladly, Todd Rakow, told me:
“You can be a good persuader but an incorrect CFO. The more that you are hoping you are right, the more risk you are opening yourself up to as a company.”
Therefore, if you don’t have the ReCurring piece, i.e., something that’s contracted, there’s an inherent level of risk underlying your thesis on what your ARR is.
Every business is different, but the more reliable you are in terms of what is a fact and known and contracted, the better you are. And it can get even better if you can predict incremental behaviors on top of that.
That’s very different than “this customer might go away tomorrow, and we hope they won’t.”
More Examples
ReCurring
Per Seat Software
You pay $15 bucks a month for your Zoom license, regardless of how many meetings you hold
Gym Membership
Equinox charges you an astronomical $300 per month for incredibly scented towels (I’ll bite)
ReOccuring:
Marketplaces
Using Uber on a regular basis to get to work
Hosting
Check out any AWS bill for a small business
Recurring + ReOccuring:
Snowflake
Contractually obligated to spend $10K per month, regardless of usage, plus any overages once you eat up your credits
Customer Support software
Sell seats to agents (ReCurring) + Telephony (ReOccuring)
Run the Numbers
Listen on Apple / Spotify / YouTube
Much of today’s post relies on a discussion I had with Todd Rakow, CFO at Gladly, a leading Customer Support software, and an expert at usage based models.
On this episode we cover:
How to accurately calculate ARR in a usage based model
How Net Dollar Retention Rate can help you better forecast your customer usage patterns over time, and serve as an input to ARR
How to commission sales reps when customer activity can vary, and where true ups come into play
Deadly false signals people can take from usage based models
And balancing being a serious CFO vs having fun and enjoying what you do
What I’ve Been Reading
If you enjoy investing in public companies, want to keep up with their performance but don’t have the time, Stock Market Nerd is definitely worth the read. My buddy Brad keeps me in the loop on relevant news from popular companies like CrowdStrike, Apple, SoFi and Microsoft - with some macro and market commentary sprinkled in.
Stock Market Nerd helps me avoid digging through SEC filings and interviews on my own. There’s no cheerleading, there’s no pumping and there’s no missing any relevant details.
Quote I’ve Been Pondering
“No more half-measures.”
-Mike Ehrmantraut, Breaking Bad
This helped me learn and apply my learnings right away.
I worked at an automated direct mail company similar to Lob.
We charged 3 subscription fee’s to use varying levels of the service. You also ‘unlocked’ cheaper mail rates.
After reading this, I understand that the subscription fee to use the service was ReCurring, while the mail our clients were buying was ReOccurring.
Interesting business model where the 2 pricing structures move against and with each other based on how you use the product.
I prefer to use the word Episodic instead of ReOccuring. At scale and with revenue consistency, Episodic can look like recurring as one cohort piles on top of the other. This is one phrase I have often used to make the connection between the two concepts. ReOccurring is too easily confused, in my opinion.