1. Why Recurring Revenue

A rising tide lifts all boats. - John F. Kennedy

What Is Recurring Revenue?

Recurring revenue is the holy grail of every professional services business. It keeps the company alive and buys enough time for the agency owners to think strategically until the company becomes sustainably profitable.

Investopedia defines recurring revenue like this:

The portion of a company’s revenue that is highly likely to continue in the future. This is revenue that is predictable, stable and can be counted on in the future with a high degree of certainty.

Recurring revenue has magical features. The money keeps appearing in your company bank account every month or every year without you or anybody in your agency having to work 80-hour work weeks. Everybody is busy doing something for the clients or working on agency’s projects, but nobody is suffering. You don’t have to chase after new clients: you mostly work for existing clients and you take on new clients only when you decide so. Recurring revenue also appears to increase its volume and it does so on autopilot: as the time goes by, there’s more and more money in your bank account. The more recurring revenue you accumulate, the harder it seems to remember that you used to struggle financially in your business.

The reason why these features appear magical to a service company owner is because service companies rarely ever build any significant recurring revenue. It’s something product companies brag about and enjoy (but only the successful ones). Most product companies are funded either by their own capital or by third-party capital (angel capital, venture capital, banks). This capital buys the company a lot of time to focus on doing just one thing: building, marketing and selling a single product.

Service companies do not create recurring revenue the same way the product companies do. If you’re a service company, you won’t get funded. Services do not scale well: expenses increase at the same rate as the revenue. Investors don’t like that, they’re searching for the next Facebook. If the possibility for you to become the next Facebook does not exist, not even in theory, their capital won’t touch you, ever.

I think this is a good thing because you’re left to your own devices to figure out your business. Yes, in the process of figuring it out you will be burning your own money and your own free time, but it’s completely doable. Your success will mostly depend on your ability to understand what is important and what is fluff. This book does exactly that: helps you focus on the important.

Who This Book Is For

You own a small website development business. You think of your company in any of the following terms: studio, agency, consultancy, software shop. To these terms you add flavors such as web, digital, creative, interactive, Internet. You’re still working in your business as a designer, software developer, internet marketer, sales geek or project manager, or you may be in the process of hiring people for any of those functions. Your company is between one to twenty people strong and you’re growing. What you’re now experiencing are typical growing pains: feast and famine cycles, bad cash flow, unpredictable revenue, various problems with clients, constantly working at full or over capacity. You feel like there must be some ‘secret’ to building a sustainable, profitable business, even without you personally working in it seven days a week. If this is your case, then I can say that I’ve written this book just for you. You’ve already got some solid foundations in which recurring revenue is the key missing piece. This book will give you self-confidence that you’re capable of putting the right puzzles in the right position quickly.

Maybe you’re still a freelancer and you’re thinking about starting a company. You want to learn from other people’s mistakes before they become your own. Use this book as a practical manual to start building the foundations of your business the right way, the first time around.

If you’re a company (co)-founder thinking about hiring your first employee(s), you’re probably afraid of making that next important step. I know how you feel: a new person is a new kind of responsibility. Making payroll gets a different meaning when you hire your first employee and a whole new meaning when there’s fifteen of you in the company. You will enjoy the advice in this book because you’ll learn that recurring revenue, when built the right way, calms most of your fears.

Or maybe your small agency of up to five people is doing great, but you have no idea what awaits you once you grow bigger, take on more projects and attract more demanding clients. I’ve walked that path myself and all I can say is that it was the recurring revenue that got us through the most difficult situations. This book will help you avoid common mistakes which agencies make when they are just starting with recurring revenue.

If you’re running an experienced agency of up to twenty people, this book will infuse you with fresh approaches and different ideas. If you’ve already built recurring revenue in your company, the book’s resources and tips will save you a lot of time. If you’re like us and you sometimes feel like you’re living in a bubble, you’ll appreciate the personal conversation this book wants to have with web agency owners such as yourself. Even if you’re doing things differently in your business than this book suggests, there’s enough value in comparing notes with us and joining the conversation about improving the working conditions in our industry to justify the price of the book.

All examples in this book are adapted for website development agency businesses. However, almost all advice equally applies to custom software development companies (web / mobile / desktop) as well as internet marketing companies in the social media marketing, search marketing and digital advertising arena. All these companies share the same trait: they sell high-value, high-tech project-oriented services to other businesses with a strong emphasis on maintaining a long-term relationship with their clients. If you’re one such company, then this book will be valuable to you as well.

Who This Book Is Not For

This book is about the business of website development. It’s not about technology. We won’t talk about HTML5, CSS3, JavaScript, Python or any other technology for developing websites. If you want to learn about technology, some of the good places to start with are Learn Code The Hard Way, Codecademy and TreeHouse.

This book does not talk about how to build recurring revenue by building a product either. The book’s only focus are companies who offer professional services and who want to continue doing so. If you’re one such company and want to start a product business, this book won’t provide you with the necessary knowledge. It will, however, teach you how to productize your services so that it’s easier and more profitable for you to continue servicing your clients.

The book also assumes that you’ve worked with clients before, either as an employee in a web development company, a freelancer or an agency owner. If you’ve never delivered a website to a paying client before, this book probably lacks certain lessons for beginner entrepreneurs. It’s beyond this book’s scope to teach your the basics of a website development process and working with your first clients. However, if you’re determined to learn about recurring revenue before you even start your first business, this book will save you an enormous amount of trouble and arm you with knowledge that even some of your senior peers lack.

In all honesty, I can’t say if this book applies to an agency of more than twenty people. I’ve never run an agency of that size. The biggest my agency has ever grown was fourteen people and I honestly don’t know what happens once your agency grows bigger than that. From what I’ve learned, different business rules and different approaches apply to agencies of twenty-ish people and more. However, I suspect that building a strong foundation with recurring revenue does not hurt on any level. This is what the book “The Business of Software” by Michael Cusumano teaches you: to create large streams of recurring revenue as soon as possible.

How This Book Is Organized

The body of knowledge in this book follows a sequence which is essential to mastering the concept of recurring revenue for web agencies.

In the first chapter, which you’re reading right now, I explain WHY recurring revenue is important and this chapter is meant to inform you and inspire you into action. In it I build my strongest case for why web agencies should stop whatever they’re doing right now and invest time in building their own recurring revenue. Too few website development companies have built any sustainable recurring revenue and my strong conviction is that they’re making a huge mistake to neglect it. That’s the main reason why I don’t mince nor spare words in this chapter to urge you to reconsider recurring revenue. Only if you’re one hundred percent sold on the idea of recurring revenue should you skip the introductory chapter and proceed to the next one. However, if you have doubts about the impact that recurring revenue (or the lack thereof) has on a creative services business, this introduction is the most important chapter and you should read it.

The second chapter is all about the WHAT of recurring revenue. It’s about do’s and don’ts and it serves to focus you on the important. There we define which services are good candidates for building a sustainable web agency business and which only lead you astray. The advice in this chapter goes directly against many blog posts that you can find freely available online if you google ‘recurring revenue for web agencies’. I’m confident that my long-standing experience with various sources of recurring revenue will equip you with information of much greater quality than the many shallow ‘list articles’ I’ve encountered online while I was conducting research for this book.

The remaining chapters are all about the HOW of implementing recurring revenue. There you’ll learn exactly how to build, sell, organize, promote and renew the types of recurring revenue that we defined in the previous chapter. The ‘HOW’ chapters contain the ‘meat’ of the book and you’ll find most of the specific examples, tips, advice and useful resources there.

The book concludes with a short summary of main ideas, concepts, lessons and tips - a tl;dr of sorts. I suggest you print out that final chapter from the PDF version of the book and keep it on your desk as a reminder and a checklist for implementing recurring revenue in your company.

Why I Had to Write a Book About the Business of Website Development

There’s no shortage of articles, videos, podcasts, books, communities, conferences and discussions on the widest range of topics about the technology of web development. If you follow popular industry websites on Twitter, you’re constantly bombarded with links to every imaginable trend, plugin, tool and library for developing websites.

But when it comes to the business of website development, the Internet seems like an eerily quiet place.

As a web agency co-founder who’s been in business for more than twelve years, I can’t help but notice that. Does any central place for us business owners exist where we could learn, share ideas and discuss our website development business? Where are all the experienced businessmen and businesswomen hiding and why aren’t we exchanging our experiences, wins and fails?

Is it because we’re too busy working in and on our businesses? Is it because we’re afraid that our competitors would steal our best strategies and tactics? Are we so wrapped up in our roles of uber-creative, super-savvy experts that we can’t pause for a minute to think about the direction in which our collective boat is sailing?

I’m sure some of us are worried about some or all of those things. But our silence is doing us a great disservice. It’s been 25 years since the web was born in 1989. We web professionals haven’t done much as a business collective to upgrade our profession since then. We didn’t set basic business standards. We didn’t improve the conditions under which our businesses operate on a global scale. Web professionals have no central place to consult, no trusted resource to learn from, no objective authority to ask when it comes to the business of website development. People spend years building websites for clients without grasping the essential business dynamics. In a world where Reddit is the best and the safest place to ask a business related question, is it any wonder that talented web designers, web developers and creative web professionals struggle in their own businesses?

Not even seniors have a good source of advanced knowledge when it comes to the business of website development. We constantly turn to related industries for relevant knowledge, but those related industries cannot solve all our problems. Most web agencies are one third software development, one third design and one third marketing. The lessons we learned from software developers do not fully apply to our business because software is mostly products, while we provide custom-made services. What marketing and advertising giants and the best design maestros of the 20th century teach us does not fully apply either because we do produce real business assets which require maintenance, while advertising campaigns and static graphic designs do not. We’re technically responsible for everything we produce, forever - such is the nature of the web - while some other industries are much more flexible, forgiving, or forgetful.

Either we’re collectively incapable of finding the right information on the Internet or the Internet simply does not contain enough quality, in-depth information about the business of web development. I doubt that we just weren’t lucky googling it.

In another words: the web really is different from everything else that man has invented. That’s why our business models are still undeveloped. We know how to use a jQuery plugin, but we don’t know how to make our work profitable and our businesses sustainable. Those among us who could have developed our business models are either too busy making jQuery plugins work, teaching employees in their companies how to make jQuery plugins work or enabling managers to teach employees how to make jQuery plugins work. Who the hell can find extra time to teach their peers how to run their businesses? And where’s the money in that?

To teach is to learn twice. It’s us, the web professionals, who need to define the rules under which our businesses will thrive. Anybody who has spent a decade or more in the web industry has the responsibility to share his or her collective business experience with everybody who is willing to listen - especially with newcomers to the field. Our industry is struggling because it’s been only 25 years since it was born. Not even common business sense has had enough time to settle in. Some of us still feel like we are children, playing with awesome technologies as if they were toys and not business tools. I’m all for staying a kid as long as humanly possible - hopefully forever - but our clients need us to solve their tough business problems with our toys. They have money. Loads of it. And they want to give it to us. We just need to learn how to ask for money and that we need to ask for it every month.

This book is focused on one single aspect of the business of website development: recurring revenue. I’ve identified that recurring revenue is the second biggest missing piece in the success puzzle of every web agency (the first being the necessity of charging what you’re worth). The book will teach you why you should demand to be paid every month, for which services you should demand to be paid, how much money to ask for and how to implement recurring revenue in your web agency. As far as I know, this book is the only comprehensive guide on the subject of recurring revenue for web agencies.

May I propose a bold idea?

To those of you who are busy running your own website development businesses, let me be your pen. I now have the free time that you may not have and that I didn’t have myself in the past. I used to be uber-busy on client projects too.

To those of you who are worried about competition, there’s great news! The world today is bigger than it was a year ago and it will be even bigger one year from now. Every year, half a billion new people connect to the internet for the first time. Among them are new business opportunities for each and every one of us. There’s no shortage of new clients, no matter what your personal experience might be telling you right now. No matter which country you live in, the rest of the world is bigger. Much bigger.

To those of you who are worried about showing that you are aware of how little you know, let me be your voice. Let me be the first one to show the world my battle scars, admit my mistakes and reveal my delusions - so that you wouldn’t have to. (But you’re totally allowed to contact me directly and tell me that you share my experience. I won’t tell.)

My bold idea is that we should collectively become that tide that lifts all boats.

With this book I am creating a small contribution to a very global and a very loud conversation about the business of website development. From my experience, where there is one person, there will soon be many voices joining the conversation. I’m inviting everybody who is passionate about web and about business to build upon the many tips you’ll find in this book and improve my thinking.

Why I Chose Recurring Revenue as the Topic of My First Book

For the past two years I’ve been observing, exploring and researching the business of website development. Because I consider writing to be the clearest and the most precise form of thinking, writing a book was the best way for me to tell the world to what conclusions my experience has brought me.

Without further ado, let me take the bluntest weapon out of my arsenal right away and smack you in the middle of your forehead with it:

without recurring revenue you’ll never build a lasting web agency business.

Are you in the business of building a real business?

What is a real business, I hear you ask?

It’s an important question to know the answer to because your values, your actions and your decisions today will have a profound impact on your career. Not everybody thinks twenty years ahead in their career path, but I did and I’m about to lay it out for you.

There are three stages in the life of an entrepreneur (I’m borrowing this from the Cashflow Quadrant in the Rich Dad philosophy):

1. Owning a job.
2. Owning a business.
3. Owning a financial asset.

The natural tendency is to go from stage one to stage two to finally stage three.

Web agency job owners personally design / develop / work on delivering the services to their clients. Their function is usually one of a designer / developer / internet marketer / project manager. Their agencies usually don’t have employees or they employ very few people to do some of the work that the agency owner can’t handle anymore.

Web agency business owners hire people to do all the work that they personally used to do. Instead of designing and developing, business owners dedicate their personal time to growing and organizing the agency business. They’re no longer website developers. They have promoted themselves to CEOs.

Owners of financial assets either sell their agency business or they hire people as CEOs. The business they’ve built becomes a valuable income-generating financial asset on complete autopilot. Once you’ve arrived here, you are in the land of plenty, where grilled geese fly directly into your mouth.

What is it that you own: a job, a business, or a financial asset?

Most of us own a job. Financially speaking, owning a job is worse than being employed. People who own their jobs (the self-employed) usually work harder and for less pay than their friends and family members who are working for the man.

I don’t know of any web agency whose owners are in the third stage (which does not mean that they don’t exist, only that they’re rare). They’re rare because it’s much harder to build a financial asset than it is to build a business.

But I know of many agency owners who own a real business, meaning that their business can continue to operate even if they don’t personally show up for labor every day.

The question remains: do you want to at least become an owner of a real business? Can you imagine yourself being the director of the show instead of performing in the show? Owning a business means that you will no longer be directly involved in any project for a client. I know that not everybody wants that, but picture yourself in your fifties. You have a family now, adult children and maybe even grandchildren. Your health is not getting better (unless you’re a techno-optimist like me and counting on medical breakthroughs). Do you still see yourself working on projects for clients, answering their emails and managing their projects? Do you feel the burning passion to be directly involved in some operational part of the web development process? If the answer is ‘yes’, that’s completely ok. But if the answer is ‘no’, you’re probably aiming for owning a real business or owning a financial asset. In that case you’ll find it excrutiatingly hard to build a sustainable business without plentiful recurring revenue. It’s the recurring revenue that helps transform a one-man band or a small company to a real agency business, the kind that can keep the lights on without their owners working in the business all the time.

Recurring revenue is how companies survive bad economies and personal catastrophes. Recurring revenue is like a safety net which is always there for you, should you ever stumble and fall. Recurring revenue is like health insurance for your business.

A company without recurring revenue can barely afford to pay for everything that makes a real business great. I’m talking about investments such as sales, marketing, managing projects, supporting clients, research, development of new creative ideas, working on new products, education and training, being able to hire and keep the brightest and the smartest employees, having enough time to work on organizing your business better, buying the best tools money can buy, traveling to attend awesome tech conferences, financing legal expenses and not working at 120% capacity all the time. As your web agency grows, its business expenses grow too. Without recurring revenue you’ll have to pay for all this either from your own profit or from accepting new clients and new projects. The latter is almost like running the opposite of a pyramid scheme: you’re financing past expenses with future projects but, unlike pyramid schemers, you’re not making any money.

Do you ever wonder how the most popular agencies manage to work on amazing projects for amazing clients and still find the time to create new products and work pro bono for their favorite causes? Recurring revenue, baby, recurring revenue. Without recurring revenue you’ll never be able to build your own R&D (research and development) department. Recurring revenue finances the time their top talent needs to work on creative projects which make the agency highly visible on the market.

Without recurring revenue you’ll never attract the kind of clients you know your talent deserves. Those are the clients who pay well, annoy you the least, who are serious about their online businesses, who have money and who are used to paying professionals for creative work. You can’t help those clients without getting to know their businesses, which takes time. You need to work with them long enough to find out how to put your services to work for their business.

If Recurring Revenue Is So Great, How Come Most Agencies Don’t Create Any?

I’ve been keeping tabs on web agencies in my immediate surroundings. I’m comparing what is happening in my business to what the others are doing. One pattern emerges everywhere I look:

1. A web agency charges peanuts for their work.
2. Because it’s constantly strapped for cash, a web agency must work on multiple projects simultaneously just to survive for another month.
3. The team devotes its full capacity to low-paid client work and it’s left with no time to work on growing their own business. The owners of the agency work on growing their businesses on the weekends.
4. Working on multiple projects simultaneously requires the most capable people on the team, usually the web agency owners, to work on client projects and to work overtime. This creates unimaginable clutter in their minds, drains all their creative energy and renders them incapable of focusing on one thing at a time. This lack of focus disables them from thinking clearly and strategically.
5. If the agency owners have no time to think clearly, their agency will always be stuck and will go bust as soon as they just can’t take it anymore or their health abandons them.

In another words: work stress fries your brain.

To get out of this situation, web agency owners should: 1) start charging more and 2) set aside enough time to work on growing their own business every day or every week.

Without that initial boost of one-time revenue from charging more money for your work you will never make the time to work on building recurring revenue. There’s a sequence to building a profitable business and charging more is where it all starts.

Once you start charging more for your work, suddenly there’s more time to think during business hours (and not only on weekends). Once you start thinking, your natural curiosity and creativity finds its way to good information (similar to the process that lead you to this book). If your mind is free enough of clutter, you will be able to recognize and prioritize actionable advice and you will want to make time to focus on what is important. In the case of you picking up this book, your clearly thinking mind told you that recurring revenue is a topic important enough to invest your time in reading this book. You are in search of actionable advice which will help you understand why you need to implement recurring revenue, what you need to create and how you need to do it. After reading this introductory chapter, you will be one hundred percent sure that recurring revenue is something that you need to start working on right now.

In case I didn’t say this loud enough - and in case you’re reading this and still telling yourself that you don’t have enough time to work on growing your business every day - let me repeat this once again.

You start by charging more for your work. Once you do that, everything changes for the better for you. And because it’s beyond this book to teach you the details of charging more, read our email story about doubling your prices in a way that will actually work for you.

Recurring revenue does not happen automagically. Recurring revenue is carefully planned, implemented, sold and marketed. Once again I repeat myself: implementation takes time. You make that time by not working on client projects. You can afford not to constantly work on client projects by charging enough money to either have free time or to hire outsourcers or employees to do your work.

Actually, there’s an evolutive process you will go through, one that all web agencies go through, at least the ones that made it. Let’s examine it more closely.

Evolution of a Typical Web Agency

There’s a natural sequence to building a profitable service company.

If you’re like many of us, you’re in your twenties or even younger and you just started your first web development business. You see yourself as a rookie who does not deserve to be paid big bucks yet. I’m not good enough yet, I’ll charge what I’m worth when I get better at this. You charge just enough to survive, pay for your business expenses and a modest salary. And then there’s more work than one person can handle and you hire your first employee. Suddenly there’s not enough money to pay two salaries. The idea that you should charge more is born. You gradually increase your prices with every new project or once every two years and everything is dandy. You completely ignore the need for recurring revenue because business expenses are low, there’s enough money in the bank to pay for this month’s salaries and there are enough friends, family members and friends of friends to create websites for. You live from project to project and you think you’re doing better than everybody else. You’re satisfied for a moment.

Then you experience your first true financial struggle. A month comes when there is not enough money in the bank to make payroll. You start thinking about more stable sources of revenue. The idea that recurring revenue is a good idea is born. You start to implement it the best way you can with your existing sales skills.

You manage to survive, but you realize that you’re losing some deals. It’s harder to land a new project and a new client if you’re focused on recurring revenue, but it’s doable. You’re also getting behind on projects because you now spend more time in sales than in design or development. You come to a conclusion that you need to sharpen your sales skills so that you close more deals in less time. The idea that sales skills are important is born. Your recurring revenue helps you finance the extra time off to work on learning new skills. You buy a book or two, watch a video or two, subscribe to a couple of newsletters which teach you how to sell website development services or you hire sales trainers to teach you sales skills. You focus on selling to referred clients and completely ignore the fact that one day the source of referrals will dry up and that you’ll need enough qualified leads to sell to and keep making payroll.

A couple of years go by. In the meantime, you probably hired a small team to work in your agency. They want to get paid every month, which means that you need to figure out every month where the next paycheck will come from. You notice that you need more qualified leads in order to sell more. The idea that marketing is important is born. You invest in AdWords and Facebook ads, start writing blogs, start attending conferences for networking, you talk at a few and you even organize a few of your own. You start sending out your email newsletter for the first time in your career. You’re surprised to see that existing clients call the next business day to buy the services you talked about in the newsletter. Leads start pouring in from everywhere, suddenly there aren’t enough hours in the day to write all the sales proposals and go to all new client meetings. You’re hot goods. You newly acquired sales skills help you sell more of everything and you’re charging more and more to increasingly better clients. Your immediate goal is to close as many deals as possible; you’ll figure out later how to deliver on what sales has promised to clients. You’re growing fast.

With your growth come growing pains. Quality of service declines. There’s increased need to hire more and more people and you’re still not rich. The faster you grow, the bigger the need for you as a company owner to stop working on client projects and dedicate your time to growing your business. The idea that a good business organization is a prerequisite to sustainable profitability is born. You invest in good software tools for managing your web agency. You document your processes. You devise a training program for new employees. Your agency gets its first real business departments: business development, marketing, sales, development, support. You’re no longer a designer or developer: you hired employees and you created jobs for all activities in the agency. You hired sales geeks, designers, developers, internet marketers, project managers, support geeks. You outsourced finances to a bookkeeping company and legal matters to an attorney.

Your final situation is that you’re charging enough and more with every project. You’re constantly building new recurring revenue. You’ve learned how to sell and how to market your business and you’ve organized profitable production and delivery of services. Now you’re finally free to work on increasing the quality of your output and making the company more profitable, more reputable, with more local and global impact, with the most qualified and the most trustworthy employees. You’ve built a real business which is growing in profits every year. You, the web agency owner, are now a real CEO of a real agency.

None of this happens without step two - building recurring revenue - which most companies never reach or skip entirely. Some of them will be unfortunate enough to learn that it only takes a few consecutive months of bad cash flow to lose the company. Some will continue to struggle for years without knowing the way out of their own mess, until one day the owners either strike gold or ragequit.

This Book Is Work In Progress And You Get To Decide About Its Contents

This is the first time I’m publishing a book and I’m not ashamed to receive help from my readers. Judging from the experience of other Leanpub authors, a Leanpub book thrives on readers’ feedback and the final edition will come out much better if the readers guide the author. It’s awesome to be able to write a book the same way software developers write software: I show you the roadmap and the MVP (the Minimum Viable Product - or, should I say, The Minimum Viable Book?) and you tell me in which direction you want me to take the book.

If you’re interested in implementing or improving recurring revenue in your company, contacting me with all your questions, suggestions and even the smallest feedback is the best way to have your specific issues addressed and answered immediately. Because the aim of this book is to start a conversation about the business of website development, the more voices join the conversation, the better this book will serve you, the reader. I expect that I will implement the results of some of your feedback directly into the book. Some feedback I might release as a free newsletter issue or a blog post on Simpfinity.com.

I also welcome the ‘Grammar Nazi’ type of comments and feedback because English is not my first language (which you’ll undoubtedly notice). Don’t hesitate to point out any mistakes, typos, inconsistencies and minor or major flaws in the writing. Before I hit that scary ‘Publish’ button, I go out of my way to polish all chapters, but there’s a reason why authors need editors for their books. I still don’t have one. You’re invited to be my temporary editor.

Send feedback to info@simpfinity.com or tweet me @simpfinity - I can’t thank you enough!