What Recurring Revenue Really Means

One of the "holy trinity" of Green Dot stocks is recurring revenue.

Recurring revenue just makes doing business easier. If you don't have it, you are constantly fighting for sales, competing for quite literally every dollar your customers spend. If you do have it, you can pretty much count on a certain baseline of sales in any given period.

That's huge. It allows a company to plan farther ahead, to align its expenses and investments with baseline sales levels. It dramatically reduces the possibility of "revenue cliffs", where sales fall off in cliff-like fashion from one year to the next. These kinds of cliffs can put financially shaky companies in real danger of insolvency if they cannot service their debt obligations. That's far less of a risk if a firm has recurring revenues.

But what exactly is recurring revenue? Certainly, there are some business models that are quite clearly recurring sales. There are also some that are "essentially" recurring. And then, there are others that may look recurring, but actually are not.

In this article, we will look into what exactly recurring revenue means, and highlight a few examples of business models where it applies.

The Key Point To Recurring Revenue

When looking for recurring revenue, you can really boil it down to this one question:

Do most customers pay the company over and over again on a regular basis?

Every part of this is important.

"Most customers" is a key phrase. There are plenty of people that eat at Chipotle (CMG) on a weekly basis. But the vast majority of Chipotle customers eat there occasionally at best, and on erratic schedules at that. For a true recurring model, most to all customers need to be involved.

"Paying the company over and over again" is pretty straightforward. I mean, that's the recurring part! The point here is that the company receives payment from its customers many times over a reasonable period of time, say 1-3 years.

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Disclaimer: The content is provided by Alexander Online Properties LLC (AOP LLC) for informational purposes only. The material should not be considered as investment advice or used as the basis ...

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