If you’re bootstrapping a startup, you’ll often be selling hours to fund your business. Similarly, many established technology companies are professional services businesses where their primary source of revenue is selling hours to customers.
In most cases, this type of work generates no recurring revenue.
Selling hours is by far the easiest and lowest risk business model to execute on. However, it has limited scalability. You’re always constrained by number of resources available to you and the available time of those resources.
Why do you want recurring revenue?
If you have a business that generates recurring revenue, you’ll realise the following benefits:
- Stable and predictable cash flow
- Exponential revenue growth
- Closer customer relationships and resulting higher customer lifetime value (LTV)
- Higher margins
- A much higher valuation for your business
How can a services business easily generate recurring revenue?
The trick here is to turn project work into a vehicle for generating recurring revenue.
If you’re delivering an application or software component, it’ll most likely need support, maintenance and hosting. These items can be bundled into a Service Contract that includes a standard service level agreement (SLA) and you can then charge customers a monthly fee for the provision of these services.
The benefit to customers is that it reduces their risk and internal operational burden, and you create a recurring revenue stream for your business.
Note: Service Contracts should not be sold as a package of support hours. If you do this you’re back to just selling hours. A Service Contract should rather provide “unlimited” support where the provision of support is limited by the terms of a SLA.
If you want to further increase that value of the recurring revenue from your customers, you should try to generate and retain reusable IP that you can charge for. Traditionally the approach meant selling licenses for your software, but these days most businesses are moving to a SaaS or subscription model where customers “rent” the software.
Are retainer agreements a good source of recurring revenue?
Many software development shops sign retainers with customers to provide support after project delivery. The problem here is that they are normally based on a certain number of hours which the customer can consume in any way they wish (i.e. support, changes, or new work). Remember, selling hours has very limited scalability. There is nothing wrong in selling a retainer as this gives you guaranteed work, but this should be for new work, not support.
In summary, if you want to generate recurring revenue, you can use services projects as a vehicle for doing this. You can bundle items such as hosting, support and maintenance to sell customers Service Contracts for the software you’ve developed on their behalf. If possible, also retain and re-use IP and use this to increase your pricing.
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