Published on: April 13, 2021
Recurring revenue accounting is the accounting technique used for auto ship and similar recurring payments from customers. Companies like online pharmacies and even pet products such as Chewy.com use auto ship models for medications, pet food, and similar regularly consumed products to ensure that customers never run out of an important product.
Your company may offer a similar model or a service-based recurring payment. The following three tips for recurring revenue accounting can help you track, manage, and maximize revenue for long-term sustainable growth.
Tip #1: Find a Profitable Business Model
The key to maximizing recurring revenue accounting is to find a profitable niche for recurring revenue. Many products can be shipped monthly or weekly, but not all are profitable.
Your model must be profitable enough to sustain over a long time. It must offer a service that will be on a regular basis, such as home healthcare, cleaning services, linen or laundry services, and consumable products such as food delivery, medication delivery, or pet food delivery.
Next, the model must be a profitable one. It’s one thing to deliver something on a recurring basis but quite another if the shipping costs eat up all the profit margin. Streaming video services such as Netflix remain profitable because they offer a recurring product with a high profit margin, and they continually strike new deals with content creators to maximize their profits.
To find a profitable business model, look to your accounting reports: break-even, sales, balance sheet, net profits. Consider what tweaks may be necessary to increase profits, such as increasing market demand or reducing costs.
Tip #2: Adapt and Adjust Pricing as Needed
It’s important to price a recurring revenue model just right so that the majority of customers opt for it. This is a key part of any recurring revenue accounting model.
Price items too high and customers will forgo the convenience of auto shipment for lower prices. Price it too low and you’ll end up eating into your margins and losing money.
Finding the “sweet spot” of pricing that appeals to the majority of customers while increasing profits is both art and science. You may need to test several prices and offers to find the right combination that appeals to the largest audience.
Tip #3: Choose the Right Software System
Software that supports recurring revenue accounting makes your task so much easier. Recurring revenue accounting requires orders, shipping and delivery, payments and payment methods, inventory, and customer satisfaction.
The delivery mechanism and tracking such a system must be flawless. Customers take a chance and trust that a company will deliver goods as promised when they sign up for a recurring revenue model. Companies must deliver, taking great care to ensure that the supply is adequate to meet demand and that payments are tracked accurately. They must also take great care to safeguard payment information, such as credit card data, keeping it secure.
Not every accounting system is up to the task. One such system is Acumatica. Acumatica is used by hundreds of companies for recurring payments. The system works with CRM, accounting, operations, and other departments to share useful and timely information about recurring revenue and support recurring bills, deferred revenue, and deferred revenue recognition.
Recurring revenue models are popular among many industries and can be very profitable if handled correctly. Choosing the right accounting software takes away many of the potential hurdles to operating a profitable recurring revenue model.
Mindover Software is a software reseller with a broad range of accounting, ERP, finance, customer relationship management, and other software products. For more information, please contact us or call 512-990-3994.