Understanding Monthly Recurring Revenue

by Dec 27, 2021Strategy & Planning

Most business owners continually search for strategies they can bank on — figuratively and literally. Whether your digital agency is just starting out or has hit its growth sweet spot, monthly recurring revenue is likely an integral part of your operational and growth strategies. 

This revenue stream is a stabilizing factor. But a deeper dive reveals so many more benefits to expanding your long-term clients. In this post, we’ll delve into the nuances of monthly recurring revenue and factors to consider during your strategic planning process.

What is Monthly Recurring Revenue?

Monthly recurring revenue is somewhat synonymous with retainer revenue. It is a well-understood and frequently-utilized pricing model among digital agencies. It’s essentially an agreed-upon, upfront cost for services paid before you provide the service. While recurring revenue provides predictable income, this pricing does have some limitations.

Rewards vs. Risks of Monthly Recurring Revenue

Agency owners frequently depend on recurring revenue for repeatable revenue generation. But you have to balance the rewards of steady cash flow against the risk of inhibiting growth.

Rewards of recurring revenue include:

  • Steady growth. Growth becomes more reliable and something you can forecast more accurately when a large portion of your revenue is recurring.
  • Easier Budgeting. Reliable monthly revenue provides a consistent pipeline of work that is a baseline for monthly income. A healthy long-term client portfolio decreases your agency’s financial risk. And the predictability it brings to your budgeting process helps you forecast and plan more reliably. 
  • Increased Value. Repeatable income also increases the valuation of your business (because your bottom line is not solely reliant on winning new customers), which investors like. 

Risks of recurring revenue include:

  • Lower Profits. Profit margins for this pricing model are often thin since you’re trading pricing power for security. Additionally, you base fees on your team’s projected hours, but delivering on your client’s needs may take more time or expertise than anticipated. To guard against scope creep that cuts into your margins, maintain frequent and open communication with your clients.
  • Slower Growth. If your pricing model mix skews heavily toward recurring revenue streams, a large portion of your team’s time could be serving your long-term clients. This scenario could reduce your agency’s ability to accept lucrative one-off projects.
  • Pigeonholed Services. In the same vein, committed resources could lock your agency into a niche where it performs the same services for the same clients month in and month out. You want to periodically reevaluate your positioning during your strategic planning process.

Monthly Recurring Revenue Models

Your shop can partner with clients in an almost endless number of ways and combinations that can lead to success for both organizations. 

Models that provide predictable, reliable work and cash flow include:

  • Software Use. As a one-stop shop for all things digital marketing for your clients, you might have access to sophisticated or necessary software needed to get the job done. Setting agreed-upon monthly fees for software use is one way to generate recurring revenue.
  • Training. Charging for your expertise is a win/win situation for you and your clients. You can offer workshops or online courses that create an environment for best practice sharing and innovation.
  • Maintenance Packages. These packages are typically highly customizable. They range from basic website updates and content management to regular site design and content writing.
  • Hosting Services. Secure website hosting doesn’t require a lot of staffing work. But it is an essential service that you can provide to your clients. This monthly fee ensures their websites are up and bug-free.
  • User Support. You could offer a certain number of monthly “help desk” hours to your clients to ensure they meet their goals and targets.
  • SEO Services. Without an effective, ongoing SEO strategy, potential customers won’t find the most attractive, well-written websites. This service is one of the most popular recurring contracts.
  • Consultation. Sometimes clients need some extra support or expert advice to get where they want to go. Setting aside hours each month to consult with clients is an excellent way to build long-term, trusting partnerships.
  • User-Based. This model is akin to licensing fees. You charge a monthly fee per user for your services.
  • Email Marketing. Your clients could budget an agreed-upon amount each month for email deployments. You will need to review click-through rates and engagement metrics each month to determine campaign success and help your client reach their goals.
  • Social Media Management. A long-term agreement allows your team to become comfortable with your clients’ branding, style, messaging, and strategic goals. This comfort level can help you manage public-facing platforms for your clients.
  • Analytics and Reporting. As a digital marketing agency, you know that these metrics can be overwhelming to clients in volume and complexity. Your expertise can help translate the data available into timely, actionable information.

Monthly Recurring Revenue Impacts

Digital shop owners touted a strong 2020, and 2021 seems just as successful. The world shifted its business to online platforms. As a digital agency, you must get the right mix of pricing models to ensure longevity and growth. Considering recurring revenue could help grow your business more reliably. 

Our research shows that agencies that utilized recurring fees experienced steady growth over the past three years.

Agencies using this pricing model posted:

  • 14% growth in 2018
  • 13% growth in 2019
  • 7% growth in 2020. 

These rates are slightly below the market average growth rates of 15%, 15%, and 10% for 2018, 2019, and 2020 respectively. Companies that employ this kind of pricing model trade faster growth for the advantage of generating reliable revenue sources. 

Promethean Research Can Help

Establishing recurring revenue is just one part of creating a successful strategy to build your digital agency. Contact us today to discuss how Promethean Research can help you grow your business.

Subscribe

Get the latest research, insights, tools, and resources that make managing a digital agency easier, delivered straight to your inbox.

Related Articles

Creating Your Agency Roadmap

Some people make trip planning seem like an art form. Once they determine their destination, they plot the best route, make “must-do” lists, and assign tasks to fellow travelers. But any master planner will tell you there’s a method to their whirlwind of activity....

Key Digital Agency Tools

Workforce surveys often ask, “Do you have the right tools to do your job?” You can find an almost endless list of digital agency tools to increase efficiency and improve your offerings. Here’s a look at why tools are necessary and some of the top-rated, most prolific...

The Future of Running a Digital Agency

The adage, “The more things change, the more they stay the same,” typically withstands the test of time. Fashion and design trends recycle. Generations display similar developmental patterns. It’s like many facets of life are on repeat. But if you own a digital...

How Does an Ad Agency Make Money?

Isn’t it amazing when you’re thinking about buying a product, and it pops up on your Instagram feed? It’s like a sign that you’re supposed to have that L.U.C. watch or take that vacation or upgrade to a new Cayenne. Algorithms make modern advertising seem like mind...

Understanding Your Agency’s Employee Utilization Rate

Modern businesses rely on renowned business thinker Peter Drucker’s pragmatic words, “What gets measured gets managed.” But how do you know you're measuring the right things at the right time to make the best decisions? Employee Utilization Rate is a key indicator of...

How Do Retainers Work?

Perhaps an appropriate follow-up question to, “How do retainers work?” is “DO retainers work?” Simultaneously, you should strategically and purposefully look at how retainers can help your business grow. Retainers are absolutely the best pricing structure in certain...

Setting an Hourly Rate for a Digital Marketing Consultant

If you are running a digital marketing agency, no doubt your client list has grown, and their needs are expanding exponentially. With demand for digital marketing services at its highest point ever, now is the perfect time to strategically consider how much your...

How to Calculate a Retainer Fee

There are a multitude of factors to consider and explore when establishing or expanding your business. Who will you serve? How and when will you scale up or down? What will your branding convey? What will success look like? During this exciting journey toward reaching...

How Marketing Agencies Get Clients

Want to know how marketing agencies get clients? It’s referrals. Our research shows that about one-third of new business comes from referrals. It’s easy to see why. They tend to happen organically (aka: owners don’t need to do much work to get them)…

The perfect level of talent for digital shops

Some of the most frequent questions we get from owners and managers of digital shops are around talent. More specifically, when to add specific positions. This post has been on the back burner for a few years and it’s time we put some data out there about how typical digital shops evolve as they grow. We looked back at some of our data on the number of employees by function for 67 digital service firms in the United States.

Share This