Recurring Revenue
Recurring revenue determines how hard you have to run just to stand still. That’s why investors pay a premium for it.
The formula
Recurring Revenue % = Recurring revenue ÷ Total revenue
The complication is defining “recurring.” Three types exist, each with different predictability:
Contractual recurring. Customers have signed agreements that auto-renew. SaaS subscriptions, maintenance contracts, insurance premiums. The revenue continues unless the customer actively cancels.
Habitual repeat. Customers buy regularly but without a contract. Consumables, replacement parts, regular service visits. The revenue continues as long as the customer maintains their behaviour.
Non-recurring. One-time sales, project work, implementation fees. Each pound requires new selling effort.
Why it matters
Recurring revenue is the single biggest driver of business quality, and investors price it accordingly. SaaS companies trade at 5-15x revenue; professional services firms at 1-2x. The difference is recurring revenue.
For management, high recurring revenue means predictability. A business with 90% recurring knows most of next year’s revenue before January starts. Hiring, investment, and capacity planning become confident decisions rather than bets. The budget isn’t a fiction. And critically, leadership can think beyond the current year — less energy spent worrying about covering costs or servicing debt, more spent on building for the future.
For investors, recurring revenue reduces risk. A business with high recurring has a floor beneath it. Miss a quarter of new sales and you still have a business. The same miss in a low-recurring business damages the year.
The distinction between 60% and 95% recurring looks like 35 percentage points. The actual difference in business quality is much larger.
Why the type matters
Contractual recurring is not the same as habitual repeat.
Contractual recurring is legally committed. A customer on a three-year agreement will pay unless they’re willing to breach. Even annual contracts with auto-renewal create friction — the customer must act to stop paying. This revenue is highly predictable.
Habitual repeat depends on continued behaviour. A customer who buys replacement filters every quarter might stop if they switch suppliers, defer maintenance, or change equipment. Nothing contractual prevents them from leaving. This revenue is predictable until it isn’t.
The distinction matters for valuation. A business with 80% “recurring” revenue from habitual purchases is fundamentally different from one with 80% contractual subscriptions. Both might claim 80% recurring; the risk profiles are not comparable.
What it hides
Recurring revenue percentage hides several important dynamics:
Customer concentration. If 80% of recurring revenue comes from five customers, the predictability is illusory. Lose one and the recurring base drops 16%. The percentage looks stable; the actual revenue is fragile.
Renewal risk clustering. Annual contracts that all renew in the same quarter create cliff risk. The recurring revenue is real until that quarter arrives. A wave of non-renewals can hit all at once.
Price versus volume. A business might show stable recurring revenue while losing customers, offsetting with price increases on remaining ones. The percentage stays constant; the customer base erodes.
Growth stage distortion. A fast-growing subscription business might show only 60% recurring because new customer bookings (one-time implementation fees) are a large share of current-year revenue. The underlying model is highly recurring; the snapshot suggests otherwise.
Why the premium exists
Recurring revenue percentage directly determines how hard sales has to work just to stay flat. This is why investors pay more for it.
Three businesses, each at £10m revenue, each targeting 10% growth:
| Recurring % | Carries forward | Must replace | New business to hit £11m |
|---|---|---|---|
| 95% | £9.5m | £0.5m | £1.5m |
| 80% | £8.0m | £2.0m | £3.0m |
| 60% | £6.0m | £4.0m | £5.0m |
The 60% recurring business needs to sell more than three times as much as the 95% business to achieve the same growth. And that’s before accounting for acquisition cost. If customer acquisition cost runs £1 for every £3 of new revenue:
- The 95% business spends £500k to hit target
- The 60% business spends £1.7m
Same growth. Completely different economics.
This is why low recurring revenue is a leverage problem. The non-recurring portion — project work, implementation fees, one-off sales — doesn’t carry forward. It must be re-earned every year before you can start growing. The sales team isn’t building; they’re refilling.
Frame it as time: at 60% recurring, the first eight months of selling each year go to replacing last year’s one-off revenue. Only the final four months contribute to growth. At 95% recurring, you’re building from February onwards.
The compounding difference over five years is enormous. The 95% business spends five years growing. The 60% business spends three of those years just staying flat.
Where it breaks down
Definition gaming. Companies stretch “recurring” to flatter the metric. A professional services firm might count retainer clients as recurring even though scope changes every month. A manufacturer might include expected reorders as recurring even though nothing commits the customer. Ask how they define it.
Usage-based models. Consumption-based pricing complicates the picture. A customer on a SaaS contract might have £10k minimum commitment with £50k average usage. Is recurring revenue £10k or £50k? The answer affects the percentage significantly.
Multi-year contracts. A business might have 95% contractual recurring but half the contracts expire next year. The snapshot looks bulletproof; the pipeline of renewals is about to be tested.
Channel dependency. Revenue through distributors or partners might be contractually recurring at the channel level but not at the end-customer level. The distributor relationship is sticky; the underlying customers might churn freely.
The decision it enables
For management, recurring revenue percentage determines how aggressively you can invest.
High contractual recurring (above 75%) means you can hire ahead of revenue, fund R&D with confidence, and plan capacity against a reliable base. The floor is high enough to take risks.
Lower or habitual recurring requires more conservative planning. Stage investments as revenue materialises. Keep fixed costs low. Build in flexibility to scale back if new business disappoints.
For investors and acquirers, recurring revenue is a quality filter. But the premium should scale with the quality of recurring — contractual beats habitual, diversified beats concentrated, staggered renewal beats clustered.
The question isn’t just “what percentage is recurring?” It’s “how certain are you that it will actually recur?”
The metric series: Part of a series on metrics that reveal what headline numbers hide.
Connects to Library: Optionality — High recurring revenue preserves strategic freedom.