Running a profitable agency is not as easy as it seems. Like other industries, the marketing agency sector experiences seasons of high and low activity. During the low seasons, finding clients is challenging.
If your agency solely depends on project-based work, you might experience irregular income and feast-or-famine cycles. This is where recurring revenue for agencies comes in. It ensures that you have a steady flow of income to service your monthly overheads and scale your business. But there’s more to it than that.
In this guide, we’ll explore everything you need to know about recurring revenue for agencies.
The main source of revenue for marketing agencies is client fees. Typically, you can use a one-off or recurring revenue model to charge for your services.
The one-off payment method is usually unpredictable. The reason being, clients pay for individual projects or campaigns as they arise, resulting in irregular income streams for the agency. A survey by HubSpot shows that 57% of marketing agencies have at least three months of available cash flow.
As a result, there’s a lot of pressure on the agency as it has operating expenses to meet and wages to pay. Moreover, financial planning and forecasting, which are key to the growth and sustenance of the business, become challenging.
The alternative? Recurring revenue.
Instead of relying solely on one-off projects, clients pay for services from month to month. In this scenario, you provide services on a regular basis, usually through retainer agreements or subscription-based services.
This way, you have guaranteed work and don’t have to chase after clients. Most importantly, you’ll be able to meet your business expenses without stress.
That said, securing recurring revenue is easier said than done. Your services have to be exceptional to entice clients to agree to an annual or monthly retainer.
It’s important to note that recurring revenue takes different forms. Let’s discuss them so that you’ll know which one will work well for your business.
The subscription-based option is the most common source of recurring revenue. The client pays a fixed amount for pre-determined services on a regular basis. The payment arrangement can either be monthly or annually.
To cater to the varying needs of clients, subscription services are divided into tiers priced differently. Once the subscription period expires, the client can choose to downgrade, upgrade, or unsubscribe.
Retainer agreements are based on the number of billable hours per month or a predetermined scope of work. Agencies and clients establish clear expectations and deliverables, which are outlined in the retainer agreement to ensure both parties are on the same page.
Some of the elements in the agreement include:
Despite achieving marketing goals for a specific period, there’s no guarantee that everything will turn out as expected. As such, some clients might need continuous maintenance and support services to ensure marketing activities are running smoothly.
The kinds of services involved include technical support, troubleshooting, bug fixes, software updates, security patches, content updates, and performance optimization. These services attract recurring fees, either on a monthly, quarterly, or annual basis, as clarified in the service level agreements (SLAs).
By now, you no doubt appreciate the importance of recurring revenue for agencies. But to fully understand its significance, let’s dive deeper into reasons why you should focus on it.
Both large and small businesses depend on cash flow to run operations smoothly. Simply put, cash flow is the money entering (cash inflow) and leaving (cash outflow) the business. For instance, the money collected from clients after delivering marketing services is a cash inflow. On the other hand, funds used to meet the agency’s expenses, such as paying employees, is a cash outflow.
At any given time, the cash inflow of any business should be predictable. This helps avoid a scenario where the business doesn't have enough funds on hand to cover expenses and other financial obligations. When working with a one-off payment method, it’s impossible to predict the cash flow, given that the income is sporadic.
Conversely, a recurrent revenue model gives you more visibility into your cash flow. You can determine how much revenue to expect from existing contracts or subscriptions within a given period. This way, you’ll only commit to expenses that your business can comfortably accommodate.
Every business wants to scale and increase revenue faster than costs. However, scaling involves taking on certain risks, such as increased expenses or entering new markets. With recurring revenue for agencies, you can confidently invest in scaling initiatives without worrying about fluctuating income levels.
Most importantly, you can factor in the costs without worrying about over-scaling because you’ll know how much money to expect.
The problem with project-based payments is that they’re purely transactional. Once you deliver the agreed services and the client pays you, that’s it. The client might return or they might not. As such, you’ll have to be on the search for new clients constantly to make enough revenue from your agency.
Recurring revenue for agencies addresses this problem. Since the services you offer are long-term in nature, you stick with the same clients. This way, you can channel the time you could have used to look for new clients to understand their needs better. The more you tailor your services to meet their needs, the more they’ll have a reason to stay.
When you have a significant amount of recurring income, your agency turns into an asset. The reason being that the steady flow of income continuously adds value to your agency. As such, when doing a business valuation, your agency will be worth more than those without recurring revenue.
If you want some financial support from the bank or any other institution, you’ll have a chance of getting it. Similarly, if you want to exit the market, investors will be competing for your agency because of its predictable and stable return on investment (ROI) over time.
Like any other sector, the marketing industry is full of uncertainties. One moment, you have a steady flow of projects and clients. The next, the market could change dramatically, and you find yourself scrambling to find new opportunities. If you don’t have a backup plan, there’s a high possibility your business won’t overcome the challenges.
Recurring revenue acts as a cushion and lets you continue operations normally. Another plus is this method allows you to diversify your services. If one service is affected by market changes, the other will make up for it.
The old saying “cash is king” is true for marketing agencies. They need constant cash flow to ensure the smooth running of operations and support growth, as well as long-term viability.
The good news is, with the recurring revenue business model, there’s a wide range of services that your agency can offer to generate continuous revenue.
The world is now more digitally connected, and people are always looking for new, authentic, and engaging content to consume. In this case, marketing agencies can choose to generate content that helps their clients develop their brand, display expertise, or build relationships with target audiences.
In return, the clients can go for monthly or quarterly retainers for a specified number of blog articles and social media posts. This way, the agency is aware of how much revenue it will receive, and the client knows what to expect within a given period.
Membership programs involve offering clients exclusive benefits in exchange for a regular fee. These benefits can include service discounts, early access to products, and prime-quality customer support.
For instance, marketing agencies can offer podcasts, newsletters, and premium informative videos to target audiences while charging a recurring fee for access.
Website management isn’t a very exciting job, and most businesses tend to ignore it. However, as a marketing agency, this is an opportunity to gain recurring revenue by offering web maintenance as a service.
It involves tasks such as updating content, addresses, contacts, data backups, and security patches to get rid of bugs and vulnerabilities. A lot of small businesses and start-ups are more likely to welcome this service for a small monthly fee. Agencies can also package it together with website building to overcome the one-off project syndrome.
In the current fast-paced business world, businesses don’t have the resources to train their employees to keep up with the competition. For that reason, many opt to hire coaches and consultants for specific training to facilitate growth and development.
Marketing agencies can take this up by providing certified coaches who offer services such as brand building, marketing strategies, and role-based training. Consultants can also provide business management guidance, market analysis, brand positioning, and website conversions on a regular subscription basis.
Although most businesses have advanced marketing strategies, SEO is still a conundrum for a good number of them. They either struggle with understanding what it is or how to use it effectively.
Others are simply not interested since SEO is a long-term marketing investment and takes a lot of time to achieve credible results. Marketing agencies can offer to take up the load of organic content creation, backlink building, and page optimization. All at a monthly or quarterly fee.
Businesses are constantly looking for leads to convert into sales. For businesses that can’t afford to contract entire marketing packages and solutions, agencies can offer to sell them business leads independently on a recurring basis.
Agencies generate leads via phone, social media, email, LinkedIn, and any other available channel that’s able to provide qualified prospects. Clients can then subscribe to get these leads on a monthly or quarterly basis.
Marketing agencies are slowly favoring recurring revenue models rather than one-off payment methods. The reason being, more customers are also shifting to incremental payments to reduce their monthly bills and expenditures.
However, to ensure continued success, agencies must constantly evaluate their recurring revenue models to maintain performance and adapt to volatile market conditions. To do this, they require ways to measure the revenue they get.
Here are some metrics agencies can use to measure recurring revenue.
The customer lifetime value indicates the amount of recurring revenue an agency has earned throughout a relationship with a specific client. Agencies apply this metric when calculating how much to spend on client acquisition and still make a profit.
The average revenue per user metric reflects how much recurring revenue an agency nets from an existing client in a set period. It also indicates which services and products are more profitable. With this insight, agencies are better off driving revenue growth among current clients rather than spending more on recruiting new ones.
The churn rate reflects the percentage of clients an agency has lost over time. Retention rate, on the other hand, is the percentage of clients the agency has managed to hold on to. It’s important to measure them side by side because a lower churn indicates a higher retention rate and more revenue, while the opposite is true.
Customer acquisition cost is a ratio of the overall money spent on recruiting a new client and how much revenue the client has generated. Simply put, it measures the return on investment of client acquisition efforts.
Annual recurring billings measure the total yearly customer subscriptions and usage fees irrespective of the product or service offered. It represents the actual cash flow and paints the big picture of how recurring revenue for agencies is generated. ARB is crucial in evaluating the success of customer-agency collaboration.
Now that you know the many benefits that come along with recurring revenue for agencies, you might be ready to hit the ground running. However, it’s important to appreciate that there are also challenges you are likely to encounter. A survey by CFO shows that 65% of businesses adopting recurring revenue models face operational challenges.
Below, we’ll identify a few common issues and explain how to overcome them.
It goes without saying that for you to implement recurring revenue successfully, you have to change how you approach clients. As mentioned, in the one-off payment method, relationships are more or less transactional. Now, you’ll have to change that view to build recurring relationships.
Most agencies struggle in this area mainly because they continue to use enterprise resource planning (ERP) software, which doesn’t focus on building better client relationships.
To avoid this hurdle, you should consider upgrading to a customer relationship management (CRM) tool. With it, you’ll be able to monitor each client from a central place. This will streamline your interaction with clients and help you market your services more effectively.
Clients like to get value for their money since this is the only way they can justify spending on your services. When repackaging marketing services, some agencies fail to optimize them to align with the ongoing value. As a result, clients may resist the change or feel that they’re being overcharged. This is delicate balancing act and can result in a loss of business.
When repackaging your services, aim to give clients tangible benefits. Most importantly, ensure clients understand how your services match the recurring pricing structure.
With the knowledge of what recurring revenue for agencies involves, let's look at how you can develop a successful revenue model yourself.
To be able to sell more of your services and products, it’s only prudent to do some research on your target customers. This helps you understand their needs and preferences and tailor your marketing strategy to attract new customers.
Take care to have fair but competitive prices for your services. Try and strike a balance between offering value to your clients and making a profit.
It also helps to have a sales prediction that you can work with to drive more sales while considering all the factors that can affect your business.
Many clients end up abandoning products when they discover that they were misled about the pricing. Having hidden and undisclosed charges is a sure way of losing customers. Be clear with how much you will charge them and for what, including taxes.
Billing transparency builds trust between you and your customers, which in turn creates more long-term work for your agency.
Once your revenue model is up and running, it’s crucial that you closely monitor your income and expenditure. Compare your actual revenue against the estimated figure to check for discrepancies.
Doing that allows you to note problems early on and adjust your marketing strategies or pricing tactics to ensure more recurring revenue for your agency.
With unpredictable revenue, the dry seasons when clients are hard to find can be overwhelming. In the worst-case scenario, your agency may even collapse. However, shifting to recurring revenue for agencies reduces the effects of market changes. At any given time, you can certainly determine the revenue you expect from your clients, enabling you to improve your financial planning.
Be that as it may, running a recurring revenue model involves a lot of hard work. As you weigh up your tech stack options to improve customer experience, collaboration, and project management, consider Hello Bonsai, an all-in-one marketing agency software.
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