Recurring Revenue for Your Business
photo credit: SideLong
Jamie Harrop had a post a few days ago about charging clients a fixed monthly fee for the web / design / maintenance work he does for them. You can read his post here.
In my business we do something similar for some clients – charging a recurring, monthly fee for our ongoing service and advice. We call it a ‘retainer’ and explain to the clients it’s easier to charge a set fee rather than charging by the hour.
Alan Weiss has a concept of ‘value based’ fees. Alan is a well respected consultant who doesn’t charge by the hour. He determines the value he is able to bring to the client and charges accordingly.
Think about that for a moment. If your advice results in a client being $100,000 better off, what is that advice worth to the client? It may not have taken you very long to come up with the advice, so if you charge by the hour, you won’t charge much. But if you charge according to the value you create, you’re able to charge more. Face it, if you’re experienced, you should be able to do the job quicker and more effectively. Alan has an article about value based fees you can read. I recommend his Million Dollar Consulting book.
The key is being able to quantify the value you create in both monetary and non-monetary ways.
I’d like to combine the two ideas – recurring revenue and value based fees – and discuss them in this article and look at ways you can introduce recurring fees to your business.
There’s a number of business models that work on recurring revenue. Some obvious ones are:
- Storage facilities that charge a monthly fee for rent
- Gyms and fitness clubs
- Pay TV
- Billboards
- Finance – think about the regular bank fees and interest payments they receive
I’m sure you can think of a range of others.
Think about gym memberships. I remember reading some academic research that showed that people who pay their gym membership monthly attended the gym more regularly than those who paid it annually. If every month you see the membership fees being taken out of your bank account, you’re more likely to want to get value for money. Regardless of how you pay, most gyms structure their membership fees so that there appears to be greater value in having an annual membership rather than a pay-per-visit membership.
In many businesses where the product being sold is knowledge or information, there may an opportunity to do something similar. The key is being able to sell a service that requires more than a one-off transaction. The most effective models of recurring revenue come about where there is an ongoing relationship between the customer and the provider and the customer is receiving something of value for the money they’re paying. In fact, that’s one of the main selling points to introducing recurring fees to your clients – I want to have a long-term business relationship with you, rather than a one-off transaction. You then need to demonstrate the benefits to them of working with you over time.
The concept of switching costs is also important to consider. Put simply, a switching cost is a cost to the customer to take their business somewhere else. For supermarket shopping, switching costs are low – whilst it may be convenient to do all my shopping at the same store, there’s no major inconvenience to me to go elsewhere other than finding my way around a new store. This can be common in businesses where the client makes their decision based primarily on cost.
Service businesses – businesses where clients buy knowledge – can build up high switching costs over time. This is because as we know more about our clients, we can work more effectively with them, being more responsive to their needs and introducing products and services to them that they wouldn’t have thought of themselves. The financial planning industry is a good example – as we learn more about our clients (and we learn a lot of personal things about them), it becomes too much of an inconvenience for them to go somewhere else. The inconvenience is not just based on costs (i.e. fees to set up a new financial plan), but time is also a major factor. The client thinks “I’ll have to spend hours with someone new building trust and helping them understand what I’m after. It’s easier to stay where I am.”
Have a think in your business about how you can build high switching costs to discourage your clients going elsewhere. High switching costs can improve client retention. High switching costs also give you an opportunity to charge a premium as the client’s decision is based on a range of issues, not just cost.
An outcome of retaining clients over the longer term is that they become more likely to refer new clients to you. As you demonstrate value over time and become a trusted outsourcing partner, you increase the likelihood of referrals.
Another benefit of recurring fees is that they allow you to budget and plan for the future more effectively. If you know you have a fixed amount of income coming in every month, you’re able to plan better and commit money to growth strategies. In some industries business valuations can be improved based on the amount of recurring revenue. If I was looking at two service businesses, and one had clients on a monthly service agreement, I’d be willing to pay more for that business based on the likelihood of that revenue continuing into the future.
Finally, if you’re looking to introduce recurring fees, understand the things you do that the client sees as being valuable. Survey your clients, ask them lots of questions – find out things you do (or don’t do) that are valuable to them. And you need to find a way to show your value, even if they don’t directly see it. We don’t see our clients monthly – most come in every 6 or 12 months, but they still pay their retainers monthly. We make sure we communicate with them regularly, and help them understand that even though we may not have spoken with them that month that we’re still doing things behind the scenes that benefit them. Have a think about your industry and look at ways you can remain in contact with the client and still provide value beyond a face-to-face meeting.
I’ve been inspired by Alan Weiss’ value based fees approach. If you’re going to look to implement a retainer fee structure, try to get away from basing it on an hourly rate. Think more in terms of a package of services you will provide, some of which is valuable to the client but not time consuming for you.
Whilst you’re looking at packages, consider putting together a choice of 3 or 4 different service packages or offers that progressively build on the range of services offered (i.e. a basic service package through to a comprehensive or premium package). Think about the financial and non-financial benefits to the clients. Think about offering a priority service to those who are on a monthly retainer.
I’m interested in whether you feel it’s worthwhile using recurring and value based fees in your business. Let me know what you think. And before you write this off and decide it would never work in your business, think again. Challenge yourself and see if you can think of ways you can charge clients a regular retainer rather than a transaction-based fee or an hourly rate.
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