Recurring Revenue or Recurring Customers?

Many investors love recurring revenue. I love recurring customers.

Earlier this month, the FTC brought an enforcement action against companies accused of making subscriptions easy to start but difficult to cancel. Earlier in the year, analysts began debating the durability of recurring revenue in certain SaaS companies as AI threatened to reduce switching costs and weaken customer lock-in.

Both events invite the same question of what makes revenue truly recurring.

Earlier in my investment career, I followed SAP. I remember when the company attempted to increase annual maintenance fees without a commensurate increase in customer value. Customers pushed back aggressively, and SAP ultimately modified its plans. Even businesses with high switching costs can’t assume customer goodwill.

Subscription business models have proliferated: streaming services, gym memberships, Substack newsletters, even car washes. I recently cancelled my unlimited car wash subscription. During the winter, I gladly paid the monthly fee because frequent washes were essential to remove road salt from the undercarriage of my truck. Once summer arrived, I canceled. There was nothing wrong with the company or its service, but my needs were seasonal.

Perhaps I'm old-fashioned, but I believe the best business models earn the customer's next purchase rather than taking advantage of their forgetfulness and inertia or otherwise making it difficult to opt out.

Think about companies like Costco, Coca-Cola, Chick-fil-A, or Trader Joe's. Their customers repeatedly return because they believe they're receiving good value for a good product. The recurrence isn't driven by contracts. It's driven by customer satisfaction.

As investors, we should spend less time asking whether revenue is recurring and more time asking why customers keep coming back. Labels are useful shortcuts, but they are not substitutes for understanding the underlying economics.

The most valuable recurring revenue isn't engineered. It's earned.