Recurring Revenue: What does it entail for agencies?
Flip Keijzer, October 17, 2017
Recurring revenue, also known as recurring business, represents an – often missed – opportunity in terms of cash flow for web development and marketing agencies. In this blog, we will be explaining what recurring revenue means, how most agencies work, and why utilising recurring revenue is important for your agency’s growth.
What does recurring revenue mean?
The definition of recurring revenue is ‘revenue that returns on a regular basis’. In short, revenue that you will be invoicing to your customers next month or next year as well. The most basic example of this is a phone subscription; your provider knows that as long as you do not cancel your subscription, you will be paying for your subscription every month. The opposite of recurring revenue is one-off revenue. An example of one-off revenue is the phone you purchase alongside your new subscription; this constitutes only a single instance of revenue for your provider.
How do most agencies work?
The conversations we have had with dozens of our agency clients and partners have revealed that the lion’s share of most web development and marketing agencies’ revenue is one-off revenue. For example, consider the construction of a new website, an SEO audit, or a user survey. These services are all invoiced only once based on the hours worked or on an estimation made beforehand.
When you rely only on one-off revenue, your company will be vulnerable and miss out on opportunities to grow. We will now explain how recurring revenue can solve these issues.
Why is recurring revenue important?
An advantage of one-off revenue is that it often involves large sums of money. However, one-off revenue also has a number of disadvantages.
Disadvantages of one-off revenue
- Acquisition = expensive
The first disadvantage of one-off revenue is that it requires you to put a lot of your time and budget towards acquisition. When your company only creates new websites, that means you have to constantly be on the lookout for new customers. And unfortunately, the hours you spend on acquisition cannot be charged to anyone.
- Hampers growth
As mentioned before, your growth is dependent on the number of hours that are available; you cannot grow if you have limited availability, and that is a real shame if you deliver really good work and have customers lining up for you to make a website for them.
- Danger to business continuity
One-off revenue is unpredictable; the economic climate may hit a rough patch right after you hire some new staff, resulting in your customers putting off new websites while you still have to pay your staff.
- Stimulates non-productive behaviour
People who are paid by the hour are less likely to work efficiently. This may allow you to invoice more in the short term, but in the long term, you will lose out to the competition.
Compared to one-off revenue, recurring revenue usually consists of smaller sums that are charged more often. Recurring revenue has a number of major advantages.
The advantages of recurring revenue
- Acquire once, invoice multiple times
The time you invest in acquiring new customers is the same as with one-off revenue. However, you not only build someone’s website or perform an analysis for them; you also keep providing them with various services, allowing you to invoice them multiple times. In short, the percentage of billable hours goes up.
- More growth
Recurring revenue consists of services that are not charged hourly; for example, you can buy in hosting, including automatic updates, and sell them at a margin. This allows you to grow without having to hire more staff.
Recurring revenue allows you to have a much better idea of the work that you will need to do in coming months, preventing you from having either too few staff or too many. The latter can be managed for a brief while, but never in the long term.
- Loyal customers
This is what it all comes down to. By supplying services that aid your customers on a monthly basis, your relationship with your customers becomes much tighter. It ensures that they stay with you and that five years down the road when their website needs to be revamped, they come to you again. This allows you to invest less time in acquisition, even for bigger projects.
If you are going to be working on generating a recurring revenue stream alongside your one-off revenue, keep in mind that it is important for you to monitor whether your business is a healthy one. Recurring revenue usually consists of smaller sums that are charged more often and are stacked on top of one another; it is a completely different type of cash flow. If you need some inspiration: We’ve written down a few ideas for recurring revenue to implement in your own agency.
Give your customers the opportunity to buy your recurring services for a year in exchange for a discount. Your customer will be happy, because they pay less overall, and you will be happy, because it results in a better cash flow and a year’s worth of certainty.
Now, you understand why it is important for agencies to have a solid base of recurring revenue alongside their one-off projects. If you are curious about what kinds of services can be offered on a recurring basis and how you can implement them within your agency, consider reading our free whitepaper, ‘Recurring revenue for agencies: benefits all around’.