Understanding Monthly Recurring Revenue

by Dec 27, 2021

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.

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