Recurring charges revenue streams are very useful for forecasting magazine subscriptions, gym memberships, software-as-a-service products (like LivePlan itself), and other offerings that involve signups, recurring billings, cancellation rates, and the like. If your business is building a subscription service, creating a reliable sales forecast is a critical step to understanding how your business will grow and what the key drivers of revenue growth will be.
To learn more about how to forecast and track your recurring revenue business, read these related posts:
- A complete guide to forecasting sales for your monthly subscription business
- The 5 metrics you need to track for your subscription business to succeed
When you create a recurring charges stream, the revenue will be calculated into your financials according to how your forecast is set for multi-month charges. Read Changing the setting for multi-month charges.
Adding a recurring charges stream to your forecast
To add a revenue stream, click Add Revenue Stream, and then follow the steps below:
Step 1: Name the stream
Enter a name or description for your subscription revenue stream:
Note: To quickly add several revenue streams to your forecast, click Save & Add Another at this step. They will be listed in the Revenue table, and when you click on them there, you can complete the process of defining each one.
Step 2: Select the type
For a subscription revenue stream, choose Recurring charges:
Step 3: Signups
From the list box, choose the month/year that you plan to begin signing people up for your subscription product or service:
If you think you will have the same number of signups per month, choose Constant amount and enter the number per month:
If you expect different numbers of customers to sign up depending on the month (for example, if your business has seasonal highs and lows), choose Varying amounts over time. This will give you a grid so you can enter varying amounts:
The first fiscal year total will be calculated for you (which is why it is shaded gray). But, you can enter estimates for the next two fiscal years based on this year's forecast.
Step 4: Charges
In this step, you'll indicate whether you charge a setup fee, or other one-time charge, when customers sign up:
Next, enter the amount you will charge for each period. This can be a constant price or one that varies over time (for example, if your subscription price varies seasonally):
Finally, indicate how often you will charge your customers. This is your renewal period (for example, are your customers charged monthly, quarterly, every six months, etc.):
Step 5: Churn rate
Churn is the number of customers that cancel your service in a given month—when they leave, they’ve “churned out” and are no longer subscribing to your service. Churn rate is the percentage of customers that leave every month.
The best way to think about churn is to think about a leaky bucket. As you add new customers to the bucket, some customers are leaking out of a hole in the bottom of the bucket. For your business to grow, you need to add customers at a faster pace than they are canceling their subscriptions.
To calculate the churn rate for a monthly subscription business, you would just divide the number of customers who canceled in a given month by the total number of customers that you had at the beginning of that month.
You can impact churn rate by increasing the pace at which you add new customers and/or reducing the number of customers that cancel. While it’s always good to get more customers, it can be a better investment to focus on keeping the customers that you have. Adding features or services that keep your customers happy extends the number of months that they will continue to pay you and can be more cost effective than acquiring new customers.
Note: If the renewal period you specified is monthly, then the churn rate applies to monthly renewals. If your renewal period is quarterly, then the churn rate applies only to quarterly renewals (and not for the months in between). Also, the churn rate is applied to the number of customers you have at the beginning of each month - before any new signups are added - and cancellations are not charged for the period in which they cancel.
Note: If you choose varying renewal rates, the churn rate that we collect and apply for each month is an average across all the cohorts. Even though the actual rate of cancellations will be higher in the first month after a signup than in, for example, the ninth month, we don't model that curve. We just treat it like it's flat.
If you have already started signing up customers (that is, you chose Before plan start date in step 3), you'll see the following overlay instead:
It allows you to enter the number of customers you're starting with (existing customers). If your revenue stream started before the plan start date, and you selected that option at the beginning of the forecast, you'll be asked to enter your number of existing customers next.
This helps LivePlan calculate your customer retention and revenue accurately. This also makes it possible for LivePlan to apply the churn rate to your existing customers, to figure out how many you can expect will cancel instead of renewing:
Editing or deleting a revenue stream
To edit an existing revenue stream:
Click on its name in the table:
The edit overlay will appear. You can click on any of the steps across the top that you wish to edit:
To delete a revenue stream:
Click on the revenue stream's name in the table:
Hover over the trash can icon, and click Delete:
Where does this entry appear in the financial statements?
Your revenue streams will be used to calculate the highlighted lines the Profit & Loss, Balance Sheet, and Cash Flow table shown below:
If you've set your Multi-month charges to "Spread out multi-month charges," you will also see a Prepaid Revenue line in your balance sheet. Read Changing the setting for multi-month charges.