What is recurring revenue?

Recurring revenue refers to the predictable and ongoing income generated from subscriptions, memberships, or repeat purchases over a specific period. In the realm of ecommerce, it signifies revenue streams that continuously flow from loyal customers who regularly purchase products or services on a recurring basis.

This revenue model contrasts with one-time purchases, offering businesses a stable and consistent source of income that can be forecasted and relied upon for sustained growth.

Why is recurring revenue important to ecommerce strategy?

Recurring revenue is a cornerstone of a robust ecommerce strategy, providing a foundation for long-term sustainability and profitability. Unlike sporadic sales, recurring revenue offers stability and predictability, enabling businesses to plan and invest with confidence

 By cultivating a loyal customer base and encouraging repeat purchases through subscription models or membership programs, ecommerce businesses can establish a reliable revenue stream that continues to grow over time.

How can recurring revenue drive ecommerce success?

Implementing strategies to capture recurring revenue can unlock myriad benefits for ecommerce businesses. Firstly, it fosters customer loyalty and retention by incentivizing customers to make regular purchases or subscribe to ongoing services. This loyal customer base not only generates consistent revenue but also serves as brand advocates, driving word-of-mouth referrals and organic growth.

Moreover, recurring revenue models offer opportunities for upselling and cross-selling, allowing businesses to maximize customer lifetime value and enhance overall profitability. By prioritizing recurring revenue initiatives, ecommerce businesses can build a resilient and sustainable business model that thrives in an increasingly competitive market landscape.

What is COGS (cost of goods sold)?

COGS, or cost of goods sold, is a business expense and important input on an income statement that refers to the total direct costs incurred by a company to produce the goods it sells. This includes the cost of raw materials used to make the product, manufacturing overhead costs, labor costs, packaging costs, and more. COGS does not include indirect costs, fixed costs, or operating expenses, such as sales and marketing expenses. COGS can be used to calculate both a business’s gross profit and gross margin. To calculate cost of goods sold, add together the value of a company’s beginning inventory plus purchases made during that same period, then subtract its ending inventory balance.

What is accrued revenue?

Accrued revenue is revenue that has been earned through the sale of goods or services, but for which cash payment has not yet been received. It is a product of accrual accounting and the revenue recognition principle, which requires the recording of revenue transactions in the same accounting period in which they are earned, rather than the period in which payment is received. 

Certain types of businesses may be more likely to book accrued revenue than others, particularly companies who complete long-term projects and receive payment upon completion of the project. For example, electricity usage is provided to customers by utility companies in one period, then paid by the customers in another period. SaaS companies also frequently encounter accrued revenue.

Accrued revenue, unearned/deferred revenue, and accrued expenses

Unlike accrued revenue, realized revenue and recognized revenue both refer to revenue in which payment has been received. Unearned revenue and deferred revenue, meanwhile, refer to revenue for which payment has been received, but the goods or services have yet to be delivered. An accrued expense is an expense which has been incurred or recognized but not yet been paid.

What is the CLTV (customer lifetime value) formula?

In ecommerce, the CLTV formula calculates the average lifetime value of a customer, or the typical amount a customer spends with a business throughout the customer’s lifetime. Along with customer acquisition costs, average order value, customer retention rate, and customer churn rate, customer lifetime value is a crucial business metric for assessing the health of a business. 

There are a variety of formulas that can be used to calculate customer lifetime value. It can be calculated using data from past customers (as in historical customer lifetime value) or data from new and current customers (as in predictive customer lifetime value). Examples of CLTV formulas include:

Measuring CLTV over time 

Regardless of the formula you choose to calculate this metric for your business, it’s important to measure customer lifetime value over time, identifying any trends in customer behavior. From there, you can hone your retention strategies to better meet the needs of your existing customer base, encouraging those individuals to stay with your brand longer and increasing your amount of loyal customers. 

Best practices for strengthening customer loyalty 

Subscription brands can strengthen their customer loyalty by creating flexible shopping experiences. Making it easy to reschedule a delivery, swap items in an order, add one-time purchases to a subscription, or even cancel an order entirely can have a positive impact on the customer experience and encourage customers to stay with that business. Customer loyalty programs, which reward customers with perks like free shipping, discounts, and exclusive access to products, can also be a useful strategy for increasing retention and customer lifetime value.

What is an ACH payment?

An ACH payment (also known as an ACH transfer or ACH transaction) is a type of electronic payment or money transfer made from one bank to another. These direct payments are processed via the Automated Clearing House network, or ACH network, a transfer system that facilitates transactions for financial institutions in the United States. In essence, ACH payments transfer money between different accounts. Common examples of ACH transfers include opting to receive paychecks via direct deposit, making direct deposits from a bank account into a college savings account or retirement account, or paying bills through a bank account rather than via credit and debit cards. ACH payments can be used for both one-time and recurring payments. 

ACH payments: Key benefits & considerations

There are a variety of reasons why individuals might prefer to opt for ACH payments as opposed to checks, credit card payments, or other payment forms. For one, because they do not need to be mailed, these types of payments are often quicker to send than a physical check. Another major advantage to ACH transactions is that they are often free, while wire transfers and other types of transfers can often come with fees. However, there may be limits to the amount of money that can be sent via ACH transfer. Additionally, cutoff times may exist for submitting transfers and having them processed by the next business day.

What is a payment method?

A payment method is a way that customers pay for a product or service. In a brick-and-mortar store, accepted payment methods may include cash, a gift card, credit cards, prepaid cards, debit cards, or mobile payments. For an ecommerce business, online payment methods may include credit or debit card options, prepaid cards, gift cards, a direct debit or transfer from a bank account, payment processors, and more. 

Within each type of payment method, there are often multiple payment options. For example, payment processors can include Stripe, Authorize.net, Braintree by Paypal, Shopify Payments, and more, while credit card options can include American Express, Mastercard, Visa, and Discover. Other payment methods include Google Pay and Apple Pay.

Best business practices to manage payment methods

When determining which and how many options for different payment methods to offer your shoppers, it’s important to strike the right balance. Offering options for multiple payment methods allows your customer base flexibility to use their preferred payment method or backup payment methods when interacting with your business. After all, not all payment methods work for every customer. However, if there are too many available payment methods on your checkout page, you may introduce unnecessary complexity to the checkout process.

Therefore, it’s important to do your research. Consider the location of your customers, as certain payment methods may be more popular in some countries than others. Different geographic locations, too, may have different preferred payment methods. Keep your omnichannel experience in mind: Are your customers purchasing more online versus in your physical stores? If so, this may alter your selection of payment method options.

The impact of failed payments

Another key element to consider is whether your brand offers recurring payment options (such as subscriptions and memberships), one-time purchases, or a combination. After all, this can not only impact the payment methods you choose to offer, but also the strategies you require to keep payment information up to date. 

Because recurring customers do not input their payment details every time they order from you, certain payment issues can present the risk of involuntary churn. Therefore, it’s important to have the proper strategies in place to keep payment information accurate. Depending on the business, these could include easy subscription management options (such as the ability to add a new payment method or update a billing address) or strategic outreach when a customer’s credit card is about to expire.

What is payment information?

Payment information is the data that is required for customers to make a purchase online. Payment methods, including credit or debit card, a direct debit from a bank account, or a digital wallet such as PayPal or Apple Pay, are a key component of payment information.

Depending on the specific payment method, other required information can include the user’s full name, credit card number, security code, and expiration date, as well as billing address, account number, routing number, and other information. Any business that has access to customers’ payment information should ensure PCI compliance so that this sensitive information is securely protected.

Keeping payment method information up-to-date

For all businesses, but especially for subscription companies who rely on recurring purchases, it’s important to ensure your customers’ payment information is up-to-date. Doing so prevents involuntary churn, keeping your customers with you for longer and improving lifetime value.

One powerful strategy for reducing friction for your customers is to allow them to manage their own subscriptions. Often, this can be done via the payments page or section of their customer portal. This way, if they’d like to submit a new payment method, select and remove an existing payment method, or update payment details, they can easily do so independently without having to engage your Support team. It’s crucial that they can do this not just via a desktop computer but also via their mobile browser and any apps you offer so customers can update their information quickly as needed.

You can also offer customers the ability to add multiple payment methods to their account so that if their first payment method becomes out of date, the purchase can still be completed with a backup payment method. Dunning, or sending out communication to remind customers to update their payment details when a credit card or debit card payment fails, is another strategy that can help keep payment information up-to-date and prevent churn.

What is market demand?

Market demand describes how much consumers in a particular segment want to purchase a certain product or service, making it an important consideration for ecommerce merchants. Market demand is determined by considering who those potential customers are and how many there are, the price they’re willing to pay for those goods and services, and the available market supply of those goods and services. It typically fluctuates over time based on a number of other factors, including time of year and unpredictable events that impact consumer behavior, such as a natural disaster. Supply and demand are closely related: As demand increases, prices increase, and as demand decreases, price decreases. 

Market equilibrium is when there is an equal balance of individual demands and quantities demanded. In other words, there is no over or under supply of goods or wildly fluctuating individual demand, resulting in a stable harmony for consumers and sellers. 

How to conduct market research for your ecommerce business

Researching market demand for your industry or sector is hugely beneficial for gathering key takeaways for your business such as pricing, managing inventory, forecasting, gathering information about customer response to certain products or services, and estimating how profitable your industry has the potential to be. Studying and analyzing trends in consumer demand is essential, as only studying demand for individual people or households may lead to inaccurate predictions and forecasting. 

A market demand curve can be represented on a graph by using price on a vertical axis and demand on horizontal axis. This typically shows a downward sloping line representing price increasing and demand decreasing. If quantity demanded increases when the price is lowered, the curve slopes upward.

Strategies for market demand research can include insightful analysis through social media surveys, tracking customer response to discounts on certain products, studying competitors, and keeping a pulse on topics and products trending on social media.

How to calculate customer lifetime value (LTV)

Lifetime value (LTV) is a crucial metric that measures the amount of revenue a company can expect from the average shopper across their customer lifespan. Factors that impact LTV include purchase frequency rate, purchase value, and average order value. When compared to customer acquisition cost and other marketing costs, LTV can help companies assess the health of their business and refine their approaches to customer acquisition, retention, and even product development. 

At Recharge, lifetime value is calculated based on the past occurrences for customers who have already left the platform. Recharge’s LTV calculation breaks down to annual revenue per user / customer churn.

What is revenue recognition?

Revenue recognition is an accounting principle that specifies how and when revenue is recognized. Because there are many possible points at which revenue can be recognized, analysts typically prefer that companies recognize revenue in a way that is consistent with industry standards to facilitate comparison of financial statements across companies. A company’s revenue recognition standard should also be consistent over time to make it easier to analyze trends in data, garner key takeaways to inform KPIs, and identify inconsistencies. 

What is the updated revenue recognition principle? 

Accounting Standards Codification (ASC) 606 was created in 2014 by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). This industry-neutral revenue recognition framework provides guidance to any business, public or private, that enters into contracts with customers to exchange goods or services. This updated set of standards makes it easier to compare financial statements of different businesses across industries.

There are five conditions businesses must meet to comply with the ASC 606 standard. First, they must identify the contract with the customer. Second, they must identify the contract’s performance obligations. Third, they must determine the transaction price of the exchanged goods or services. Fourth, they must allocate the transaction price of the exchanged goods or services. Fifth, once each performance obligation is met, revenue should be recognized.

What is a merchant account?

A merchant account is a type of commercial bank account that enables businesses to make, accept, and process credit and debit card payments. Once a customer makes a purchase, the funds are initially deposited in the merchant account before eventually being transferred to the business bank account. 

In order to offer electronic payment options and open a merchant account, a business owner must make an agreement with a merchant acquiring bank. Terms of the agreement often include costs per transaction charged by the bank, the card processing network of the bank and associated fees, and any other recurring fees charged by the bank. 

Types of merchant account providers

Merchant account providers generally fall into two categories: traditional merchant accounts, and payment service providers (PSPs). Payment service providers allow businesses to accept online payments without setting up a merchant account. This option allows businesses to start accepting electronic payments more quickly, but it can also be less customizable, and may not allow price negotiation with the terms of agreement. Examples of PSPs include PayPal, Stripe, and Braintree.