Want to Add Recurring Revenue Into Your Services-Based Business? Here’s How.
If I were a betting man, I’d ask you to check your most recent credit card statement. Odds are you’re getting billed regularly for some kind of recurring service.
Netflix. Amazon Prime. That recurring shipment of pet food every couple of months. Your website domain and hosting packages. Software like Google Apps for Business or Dropbox.
Since 2003, I’ve been madly in love with recurring revenue.
That was the year my partners and I decided to transition our accounting firm from billable hours to a flat-fee, recurring model with our clients.
Was it easy? Not at all.
But it’s transformed our business from that of a traditionally structured, seasonal-based accounting firm to a more optimized, streamlined business. The value we bring to our clients is also much higher.
So what do I mean by a more streamlined business?
Well, by making recurring revenue a priority, we’ve seen:
- Higher lifetime customer value (LTV). The average amount of revenue we receive from each customer (over the lifetime duration of the relationship) has gone way up. Another way to think about this is that our churn rate, the percentage of customers that do not come back a second, third, fourth, etc. time has gotten lower. By structuring our business in a way that provides value over and over again, each customer ends up paying us a lot more money.
- Getting paid right away (on a recurring basis). Many businesses without recurring revenue models run into cash flow challenges. Say you hire a couple of new team members for a few big projects you’ve got in the pipeline. Even if those projects run super smoothly, you’re probably not going to get paid 100% up front. With recurring revenue, your cash flow is more predictable over a longer range of time. It’s easier to forecast and to prepare for anticipated investments.
- Less seasonal pressure. Like many traditional accounting firms, our February, March and April used to be pretty tough. Now that we’re in longer-term, recurring relationships, our client files and notes are dynamically updated on a regular basis, making tax time much easier.
Again, it won’t be easy. But if you’re serious about adding recurring revenue to your business, here are three things you’ll need to do along the way:
1. Set goals.
You don’t have to be a Netflix or Amazon to gain value from a recurring revenue business model.
First, think about what your goals are. If you own a web development or design agency with 5–10 employees, and you’re bringing in $500,000 in annual revenue on a project-by-project basis without having to do much sales…would you throw caution to the wind, abandon all project-based work and dive headfirst into recurring revenue?
You might take a bit of time to figure it out. To build it into your forecasting model and to run some experiments.
Yet, if you’re a one-man freelancer who is tired of chasing projects and looking for a more sustainable business model, you might move a little quicker.
Take a look at your situation and set some clear, appropriate, deadline-driven goals and milestones to get things moving along.
2. Pick your model (and think outside the box).
Not all recurring revenue is generated the same way. It’s not just software, folks! I talk to so many business owners who say:
“We can’t do recurring revenue in our industry. It doesn’t make any sense with our clients and what we do.”
I call BS. That’s a limiting belief.
If a bunch of bean-counting accountants like us can break the mold and find a way to offer value on a recurring basis to our clients, then you can too.
Here are a few examples of service-based businesses with recurring revenue:
a) Reaction Marketing — a creative services agency out of Alberta, Canada.
I hopped on the phone with Reaction Marketing’s Agency Director, Mike Szyszka, to chat about their company’s shift to recurring revenue:
At the end of the day, building an amazing website for a client was fulfilling, but it was also somewhat limiting. We’d wrap up the project, shake hands, and then that was that. While building a recurring-value model for our clients was tough and required a completely new set of processes and learning rituals for our team, it’s allowed us to form more meaningful relationships and had lead to stronger results for our clients.
b) Alley Interactive — a digital agency for news media and non-profit organizations.
The CEO of New York City-based Alley Interactive, Austin Smith, had this to say about his company’s recurring revenue model:
By way of background, the recurring revenue we earn is simply retainer-based digital product consulting — design, development, and strategy. Most of our clients are big news companies or big non-profits.
I asked Austin to dive a little deeper. How does a recurring relationship look with a large news organization? How does his team keep delivering value month-over-month, and how have they adjusted their mindset to foster a longer-term relationship with their clients?
Austin shared the following thoughts in a recent email:
Our niche — news media — lends itself well to ongoing relationships, since news sites have constantly-evolving digital needs. In fact, our first-ever client was a newspaper on a simple monthly retainer.
We’ve structured our company much like a law firm, with the ultimate promotion for our staff being to the partnership. This model also lends itself well to long-term relationships, which are the lifeblood of most law firms.
We approach long-term relationships with our clients as a solution to ongoing technology problems, strategic challenges, and product development initiatives. I think if we looked at it simply as a sales challenge, we would have much less success, and we would frustrate our team with uninteresting work.
We gain recurring business by demonstrating the value of a long term relationship, and we avoid making rules for our clients that would make them hesitate to engage us over the long run. By default, our retainer contracts are month to month and unused hours carry over to the next month.
Many firms build recurring revenue by creating artificially high switching costs, either in their work or their contracts. Rather than make it difficult for clients to leave, we try to make it easy for them to stay.
We price our long-term work to be competitive with a full-time in-house team, but we make up for the lower hourly rate with reliability and volume. An important sales skill is helping clients understand their true internal costs and the risks of building a team around a product built by a vendor — most executives we work with intuitively understand the challenges here.
We keep our recurring business by maintaining a high level of reliability and flexibility. The demands of news websites are dynamic and change in accordance with the news cycle. Our clients know that they can get their partner on the phone just about any time, day or night.
We carefully foster an internal culture that respects ongoing work as much as new projects, and we build our projects as if we are going to have to maintain them forever.
c) WP Curve — providing 24/7 WordPress support to customers who pay $79/month.
A bit of a different market here, but WP Curve carves out a great niche in WordPress ecosystem, offering unlimited (small) updates to your WordPress site for a flat rate of $79/month.
d) Kudu.io — AdWords consultants on a monthly basis.
Here’s another model that’s more niche. Kudu charges a monthly fee to manage their clients’ Google Adwords accounts. They offer a few different pricing tiers to cater to clients with different spend budgets.
On that note, let’s get back to our final recurring revenue tip:
3. Make your pricing value-based (and transparent).
Here’s the thing.
If you’re asking someone to pay you money on a recurring basis, the value you and your team offering should be incredibly clear.
You’ll need to break free from thinking in terms of pitching, scoping, and quoting one-time, project-based work, and to start thinking about what kind of recurring value you can provide to clients on a regular basis. Is it maintenance? Is it peace of mind? Is it stellar reporting and strategy?
Value can take many forms.
And like I wrote earlier, if my team can figure out a way to do it in the accounting world, an industry dominated by hourly client billing, you can too.
A final word on tiered-based pricing from our friends over at Teehan+Lax:
A tiered model lays out multiple options at different price points and empowers purchasers to make better, more informed decisions that feel less arbitrary. I wish I had a simpler name for it, because it really is a very standard and straight-forward way to price things out. Here’s a template that we developed for a recent client:
I could write an entirely separate post on pricing, so I’ll stop there, but bottom-line — the first step in communicating recurring value to your clients is to nail your pricing page with clear, value-based options.
Adding recurring revenue to your business can be a game changer.
I welcome your questions, comments, and if you’d like to be featured at the bottom of this post, specific examples of how your company offers recurring value to your customers.
Jody Grunden is a nice guy who likes hockey, golf, and his family. He also meets with businesses on a weekly basis as a Founder and Managing Partner over at Summit CPA Group, a Virtual CFO firm that helps growing companies manage (and improve) their finances.