How to Think About Recurring Revenue
More app developers are considering how to incorporate recurring revenue into their applications.
More app developers are considering how to incorporate recurring revenue into their applications. This comes as Apple has incentivized subscriptions by lowering their fees after one year of subscription renewals and adding support for introductory pricing. Before taking the leap to a recurring revenue stream it’s important to have some intuition for how revenue works for an app with subscriptions.
A Standard Revenue Model
For normal, one-time purchases, revenue can be modeled as the following:
Revenue equation for an app with one-time purchases.
Downloads is the number of new users downloading your app. Conversion rate is the probability that a user buys your in-app purchase, ranging from 0.0 (no purchases), to 1.0 (everyone purchases). Average price is the price paid on average for a purchase.
One thing to know about this model is that conversion rate is dependent on the price. Conversion rate is roughly inversely related to the price: if the price decreases, the conversion rate will improve. The relationship follows a sort of demand curve. The conversion rate can be improved without changing the price. This can be done by doing things like adding new features, improving the app experience, or changing the placement of the point of purchase.
A Recurring Revenue Model
For recurring revenue, the model looks somewhat similar to the one-time model, with the addition of revenue coming from renewals.
The recurring revenue model adds a non-linear term dependent on the churn rate.
The revenue for a month equates to all the new business from said month plus revenue from previous months. Recurring revenue from previous months is reduced from its original level because some proportion of subscribed users will stop renewing their subscriptions, churning out. This proportion is called the churn rate.
The churn rate (CR) is the proportion of users who unsubscribe every month. Churn can become a powerful lever in boosting revenue, because as churn rate approaches zero, monthly revenue grows exponentially. However, a typical value for churn rate is anywhere from .15 to .50 but depends heavily on the nature of the subscription.
Thanks nerd, but what does it all mean!?
Unfortunately non-linear functions with co-dependent parameters aren’t so easy to think about. Sometimes the best way to understand a complex equation is just to play with it. That’s why we created the Revenue Model Calculator.
Set the parameters and see a projection of revenue for the first 12 months of your app.
The calculator will let you quickly put in different values for conversion rate, monthly price, and churn rate to see how they effect monthly revenue over the first twelve months. Go ahead, try it out yourself.
Playing with the different combinations of conversion rate, monthly price, and churn rate, you will hopefully gain an intuition for the dynamics of a recurring revenue model. You can also check out the examples below to see some different scenarios.
RevenueCat is the best way to implement subscriptions in your mobile app. We handle all the complicated parts so you can get back to building. Request an invite today at https://www.revenuecat.com/
One Time Expensive: A user pays a higher price once
Recurring Cheap: A cheaper, recurring subscription
Recurring Expensive: A user pays a higher price recurring, lower conversion Recurring Cheap: A cheaper, recurring subscription, higher conversion, lower churn
High Churn: A relatively high churn rate Low Churn: A relatively low churn rate