Building a Recurring Revenue Product Portfolio for a Scalable Business
Businesses in the professional service industry that perform project-based work face the issue of lumpy workloads and – consequently – revenue. One of the ways to reduce this variance is by adding recurring revenue products to its portfolio, which is instrumental to scale your business. This strategy allowed us to start the year with 20-25% of our revenue already booked, but how should a product portfolio actually be structured to set up a business for scale?
Recurring products or services seem like a natural fit for some businesses, but less so for others. It often requires a different perspective and a deep look at how to add value for customers. What services are they willing to pay for – next to project work? When a business manages to provide a thorough portfolio of recurring services, it is able to create additional revenue streams from a variety of clients, with varying levels of commitment and different levels of stickiness. This results in a more steady flow of revenue and as it turns out in our case, happier customers.
When the majority of a company’s workload is tied to projects, it can be hard to accommodate existing customers that require maintenance, support or consultancy work. Teams often get swamped with projects, meaning that they do not have the availability to help out existing clients, sometimes for months. While businesses can account for this while scheduling, most managers will prioritize guaranteed revenue over "maybe" revenue.
Lots of clients do not want to take the risk of getting left out in the cold. This can be tackled by offering clients the option to pre-book availability over an extended period. All our customers are offered the option to pre-book capacity from our team when a project is scoped. These arrangements start at 100 hours a year, or about a day a month. This means we will be in constant contact with our customers throughout the year, making improvements to products on a monthly basis.
Improved service levels
When businesses support mission critical processes for their customers, they need to pick up the phone when things go haywire. Without a service level agreement (SLA) customers are generally served on a best-effort basis. These kinds of products are often offered in IT, but can also be applied to other types of businesses as well. Some organizations might want to have a cleaning crew on standby, or a snow removal company. Lawyers often have retainers in place for the same reason.
Unlike reserved capacity, service level agreements guarantee response and resolution times, either during business hours, after or throughout the year. They are not tied to an hourly rate and therefore allow for margin improvement. If service level agreements only cover business hours, there are very little organizational changes required, other than prioritizing incoming work orders. The actual work performed is typically charged separately.
The introduction of service level agreements might require a substantial mindshift, though. It did for us. When a customer had a time sensitive request, we would typically go out of our way to help them out. While this is a very customer-centric approach in the short term, it is unsustainable in the long run. Helping out one customer often means not helping out another customer. Or making over time. Two things we always try to avoid. Service level agreements allow some slack so you can serve all your customers as required.
Products that are used by customers themselves are often at the mercy of its users. It is easy to abuse a well-calibrated piece of equipment, or use a project-deliverable for things it was not meant to do. Monitoring the use of a delivered product can be crucial for customers to get good returns on the purchased product in the first place. This monitoring can be performed at multiple levels:
Who is using the product and are they qualified to use the product?
How is the product performing through time?
What is the quality of the product’s output?
Offering maintenance, continued training and quality assurance are simple services that can be offered at different price points for different scopes. One of the services we offer is the continued patching of software. This ensures that the products we deliver remain secure; an easy sell to most businesses.
If the service or product a business offers requires little maintenance, is of transient nature or has a long lifetime, it becomes harder to solidify a client relationship due to the limited interactions. For this reason it might have strategic value to offer add-on products that are not at the core of a business model, but offer a way to continue to engage with customers. Offering consumable products that are closely linked to your core products are great ways to do this.
Water descaler system installs are good examples of these one-off projects. Once these are set up, they require very little maintenance, but they do require large amounts of salt tabs to function. This model is used by a local business at relatively small margins, but they always remain top of mind, which has helped tremendously in terms of referrals.
As a digital agency we offer hosting services for a different reason. We remove the burden for our customers to find another vendor and always have a good reason to engage with customers that wrapped up their initial project with us. This isn’t a high margin product, but is very sticky, meaning that customers tend to stick around for several years.
Even business models that are based on hourly work have quite a few possibilities to introduce recurring revenue products. These are still often tied to hourly rates, but having this revenue locked in and spread over a long period of time, is a huge help to grow a business sustainably. Working on projects while also offering these continued services will require some organizational changes, as it will put continuous pressure on a business’ availability. Availability that can not be used for project work. Yet this downside greatly outweighs the benefit of having a continuous source of revenue.