The Why & How of Recurring Revenue

It's easy to see at a high level how recurring revenue is advantageous: It seems like you don't have to go out and sell to fill your pipeline just to stay even month over month. You eventually want to sell your business and it makes your assets more valuable, right? Resource allocation is much easier to manage?

Although this is somewhat true, there's a lot to unwind when it comes to building a service offering around a recurring model and how to make it valuable for you, your customer, and an acquirer. It is not simply spreading your project effort out over a long period and equally distributing the costs over each month. That's not recurring revenue. Read on as we dig into this a little more.

First, why should I care? What's so great about recurring revenue, all dollars are equal in value, aren't they? Actually they aren't. Generally speaking, someone looking to acquire your business will value true recurring revenue dollars at a higher value relative to single-purchase / sale services and products. Why? The easiest answer is "predictability". The more we can reduce risk and unknowns in our businesses, the better we are able to plan and forecast. For you, the business owner, this translates into the following:

Better Resource Management / Planning Efforts: You know how many widgets or materials to order because you know how much you are delivering next month. You also know how many hours will be spent working on client accounts, the skills required, and it makes time allocation and hiring much more predictable. See

Consistent Income

Ongoing Customer Relationships: You stay actively engaged with your clients each month, building a stronger and more effective model for trust and deliver. You each invest in each other to provide and receive better service.

Significant Increase in Value

Growth Opportunity / Headache Reduction: With a customer already “sold" each month, you require less new sales effort to grow your company. This isn’t a magic bullet, but it is seen as much more “revenue additive” compared to traditional single-use products or services. The predictability in delivery reduces operational friction and allows you time to build more efficiencies since each project or delivery isn’t a one-off effort.

Why it is good for your clients:

Spread out the costs

Fixed Monthly Fees

Active / Ongoing engagement

Less Paperwork

Access to Resources / Service Level Agreements

Flexibility (if done right): I add this in because some people see a subscription service as less flexible than traditional custom projects or services. I disagree if structured properly. Instead of pushing back on your client due to scope creep, or ask for additional hours due to budgeting, a recurring model allows you to shift priorities and focus on the important items for the client in a given period without worrying about overall impact. Since this isn’t a single project with deliverables and a fixed cost, you adapt to the monthly change in needs with your client. They will be happy for your flexibility, meet their more urgent demands, and you can shift back to other efforts as needed. Be flexible, make your client happy.

How do you start, and what are the gotchas? This is a very different conversation depending on the type of business you own or run, so I will try to keep it high-level. First of all, don't just take what you sell now and spread it out from a one-time sale to a 12 or 36 month process. Some people try that and call it recurring revenue. Thinking of recurring revenue is a set of goods, services, or activities that you can deliver to your clients that will show ongoing value over a somewhat indefinite period of time. Why are you unique in your ability to deliver this service? How does it provide value to your clients over the one and done sale? Take a look at the list above and see if your products or services can align with some of the elements in that list.

For example, if you sell project or consulting services via individual contracts, you may have found the inefficiencies of going back to the client for change orders, additional contracts for more work/hours, or project hold-ups extremely difficult overall. You sell and you deliver, you shouldn't spend a lot of energy on the process in between the those two critical aspects of your business. You may have "solved" this by selling a bucket of hours to your customer with the agreement they need to be used over a 12 month period. This may even be a "use it or lose it" arrangement. Although this seems a little better, you still have resource management, variability of accrued income, and the concept of a project or tasks to deliver. Then you have to sell it all over again next year.

I challenge you to think of the elements of those projects, not the entire projects themselves, that you could perform each month. For example, training, support, governance & strategy planning, road mapping efforts, report generation, etc. Even if you perform and deliver an excellent product and solution for your client, both during and especially after that project is completed, a black hole is often left behind. What does your client need to succeed after the project has been completed. In these days of cloud capability, constant feedback, ever-changing tools and software, employee attrition / growth, the needs of your client continue to adjust rapidly. How can you be there to assist in real-time for a reasonable monthly fee. In some cases it is just an insurance policy.

Although there is so much to discuss, the goal of this article is to get you thinking. I'll put one more element out there: Contracts. The key to a legitimate recurring revenue engagement is a contract between both parties where you agree to be prepared, provide the resources, complete the tasks, allocation, or products with a service level agreement each month. It's your job to manage your growth, hiring to meet demand, proper training of your personnel, etc. In return you are asking for a commitment from your client to cooperate, appreciate, and pay for your services in fixed payments for a period of time with the expectation that they will renew the contract again if they are happy with your product, financially able, and continue to need the goods and services.

I hope this gets you started!

-Ryan