Most agency life thrives on project revenue, the lifeblood of service-based businesses. There is no better way to level up our agency than by consistently selling new clients and projects. Yet the scary reality of project revenue is that the moment we stop growing, we start shrinking.
Some agencies do recurring revenue quite well. At Upsourced, it's our predominant form of revenue. Recurring fees have enabled us to grow consistently, with no one client representing over 2% of our overall revenue, a crazy stat if you think about it. Hyperbolic growth? No. In our case, slow and steady wins the race.
If you find yourself relying only on project revenue, consider the following to add recurring revenue to your business and reduce risk when things are choppy.
Retainer Contracts
Retainers come in 6-12 month increments and sometimes longer. While they offer security, retainers are usually just a reservation on our time and can limit our ability to drive high margins. In fact, in most cases, clients will ask for retainers to hedge their costs and gain more negotiating power, and that's not a bad thing but a trade-off for securing a longer-term contract. Retainer projects are great ways to add stability to your agency but try to maintain target gross margin levels of 40%+ when estimating pricing. If it's much lower, the cost-benefit may not be worth the long-term lock-up of resources.
Managed Services & Support
If your agency builds websites, apps, or any digital experience - make sure to book-end the deliverable with a support and maintenance contract. While the price is always lower than core services, support contracts enable us to secure recurring revenue for an extended period. While these tend to be "fixed fee" monthly or annual contracts, we should drive a target of 65%+ gross margin on these services if managed adequately. So even though $500 or $1,000 per month may not sound like much, by stacking a few, you can quickly drive more profit with smaller resources.
Marketing or Performance Marketing Retainers
Monthly recurring fees are typical for agencies that supply inbound marketing, social media, or performance marketing. Much like retainers, they are an advance or reservation on our team's hours and output. Securing these for an extended period can dramatically reduce risk in our client portfolio. However, just like retainers, watch hours and manage scope closely.
Inefficient deliverables, scope creep, and wage increases are critical variables that can make these contracts liabilities. If you find yourself underwater often, feel free to ask for a change order to renegotiate fees... Like retainers, target a 40%+ gross margin and consider over-the-top success fees if you hit vital performance metrics agreed upon with the client.
Subscriptions or Memberships
Subscriptions are tricky but the holy grail of recurring revenue. In a retainer model, we secure monthly revenue streams for advanced rights to our team's capacity. In a subscription or membership model, we secure monthly revenue in exchange for access or “value”. This subtle and significant difference should allow us to drive higher margins.
Subscription services tend to be tied to "consulting" or "coaching," while memberships may look like access to monitored "mastermind" groups. Specific examples include executive-to-executive coaching, brand evaluations, and agile methodology coaching. With subscription contracts, we should sell the most premium essence of our expertise. Expect to drive target gross margins of 75%+ on subscription contracts by supplying access, not hours.
Have you added recurring revenue to your agency in a way not mentioned? We'd love to hear about it!
For more, tune into the podcast episode below!