Neil Patel called it “the new black of Internet marketing.” Steve Penfold says your digital agency is “nuts” not to do it.
What is this new agency must-have? Recurring billing. If your ad/marketing agency hasn’t mastered the recurring revenue model, you’re leaving money on the table. And no agency can afford to do that.
In this blog post you’ll learn:
- Problems with project-based billing for ad and marketing agencies
- Benefits of using a subscription billing model for your agency
- Common recurring revenue opportunities within marketing agencies. Learn how to offer the services you’re already providing as a subscription package.
We’ve previously mentioned the trend of agencies moving to subscription-based business models from the traditional hourly or project-based billing, but it’s worth taking a deeper dive into the topic. Before we discuss what’s hot about recurring revenue, let’s talk about why the agency billing norm isn’t working anymore.
Issues with hourly or project-based billing in digital agencies
Project based work is such a damn hard way to make money, and even harder to grow an agency sustainably.Steve Penfold, Elucidat Director
Penfold explains, “the biggest issue with selling services based on hourly or daily rates is that you will always be confined by the number of hours in the working day. The most money you can make in a day is: day rate * number of billable staff.”
And the income agencies make is rapidly decreasing. Research found that “under the current time-based billing model, advertising agency income ‘per unit of work’ has fallen 40% during a steady 20-year decline.”
Client acquisition is costly
In addition to declining income via the project-based billing many agencies use, you also have to take into account that it costs more to acquire a new client then it does to retain a current client. How much more may surprise you. According to Bain & Company, “it costs 6-7 times more to acquire a new customer than to retain an existing one.”
“New clients pay less than old clients, and they expect even more in the way of creative outputs (deliverables) and results,” writes Michael Farmer, author of “Madison Avenue Manslaughter: An Inside View of Fee-Cutting Clients, Profit-Hungry Owners and Declining Ad Agencies.”
Unpredictable for both agency and clients
Project-based billing means revenue can vary greatly from one month to the next. Agencies may find themselves having to layoff employees after a large project is finished, or find they don’t have enough employees to effectively manage a sizable project.
Employees are aware of the repercussions of unpredictable revenue stream and it “can make your company culture very fragile and make people nervous about their job stability which will finally lead to low employee efficiency,” says Nikola Radivojevic of digital agency Orange Hill Development.
Brandon Dempsey, managing partner at goBRANDgo!, describes the effect of project-based billing in their marketing firm:
“In 2014, we had some months when we billed over $150,000 and some months when we billed $80,000. These swings in revenue cost us virtually all our profit; we were often paying for people to sit in our office without anything to do.”
On the client side, the time frame (and cost) given in the initial estimate often falls short of the time and resources it actually takes to complete the project. The client is then faced with a larger final bill than originally anticipated. Which, of course, doesn’t help with client retention.
Promotes inefficient employee behavior
When an hourly-billing model is utilized, “[an] agency is not incentivized to work efficiently and may, even unintentionally, add unproductive hours to the work,” writes Chris Goward, co-founder and CEO of WiderFunnel.
CEO of Matrix Marketing Group George Schildge elaborates: with project or hourly-billing “marketing agency employees are not motivated to minimize distractions, maintain accurate time tracking, or adhere to cost effective work habits.”
After reading all that, it’s easy to see why so many ad and marketing agencies have moved to a recurring billing business model.
Benefits of recurring billing for ad and marketing agencies
When you have a predictable, recurring revenue stream you can spend less time worrying about finances and more time focusing on growing your business.
The priority should be “transitioning one-off engagements into client relationships which produce recurring revenue. This immediately has positive knock-on effects elsewhere in the business: it smoothes out the feast-or-famine cash flow cycle endemic to consulting, allowing you to invest confidently in things which grow the business, like onboarding new employees or moving your practice into more lucrative directions,” says Patrick McKenzie, entrepreneur and Principal at Kalzumeus Software.
Increases income
Remember that Dempsey said during the time his marketing agency used project-based billing, the “swings in revenue cost us virtually all our profit.”
When marketing and digital agencies move to a subscription-based business model, your revenue becomes more predictable and you can staff accordingly.
When agencies move to subscription billing, clients will frequently sign up for 3-month, 6-month, or year-long contracts. You still need to ensure you’re providing quality service and results to your clients, but recurring billing further aids in client retention. “Increasing customer retention rates by just 5% increases profits by 25% to 95%,” according to a study by Bain & Company.
A more predictable cash flow also allows for business stability and long term planning.
Increases customer satisfaction & customer loyalty
Earlier in the post we discussed how project-based billing can mean inefficient employee behavior, and unpredictable results for both agency and client. That makes for an unhappy customer.
Moving to a subscription billing model gives your “agency more flexibility in choosing the activities that are likely to give results rather than just those that spend more time,” according to Goward.
A recurring revenue model also increases customer satisfaction by allowing your agency to “build long lasting relationships with your customers, get to truly understand what they need, and then ensure your products and services meet those needs,” explains Penfold.
Happy, satisfied customers are loyal customers.
Improves creativity
Guess what? When you’re not worried about unpredictable income (and how you’ll pay employees and other overhead costs) you can focus on more innovative and creative marketing/design solutions for your clients!
Now that we’ve dissected the problems with project-based billing and the benefits of recurring revenue models, the next question is how to move from one business model to the other.
Common recurring revenue opportunities within ad and marketing agencies
Your agency is likely already offering services that can transition into the subscription economy.
Bizango is an online marketing agency that serves local and national businesses. The screenshot below shows how they package services into different price plans for a recurring revenue model:
Below is a list of common agency services that can easily be transitioned into recurring revenue. It isn’t an exhaustive list, but should be enough to get the ideas flowing on additional ways your agency can move to a subscription-based business model for your services.
Search Engine Optimization (SEO)
Not surprisingly, in the 2015 State Of The Industry Report by the Search Engine Marketing Professional Organization (SEMPO), SEO was the “most prevalent marketing activity conducted by both individual marketers/clients (94 percent) and agencies/consultants (92 percent) among the respondents.” SEO services can include keyword research and optimization, meta tags, sitemap.xml creation and management, link building, and more.
“As a design and development agency you may say ‘we don’t do SEO’ but it seems a shame for you to give away this revenue to an SEO agency when it is something that you could easily offer yourself with very little effort,” recommends Penfold.
Content Marketing
Content is king. You know it and your clients have heard it. Content marketing can include creation and promotion of blogs, infographics, videos, podcasts, whitepapers, e-books, press releases, website copywriting (optimized for SEO), etc.
The marketing agency Youth Noise offers a variety of content marketing services, and has monthly subscription pricing plans for each service. Below is an example of one of their subscription-based content marketing packages.
Social Media Marketing
Social media services can include analyzing a client’s current social strategy, creating a comprehensive social media campaign, writing social posts/tweets, etc. Penfold suggests you “combine the service with a monthly ‘social media impact’ report for maximum effect.”
Social Medium focuses on social media and online reputation management services (it is common for online reputation services to be paired with social media offerings) for local businesses. Below you can see a partial-screenshot of their subscription pricing plans, and the specific social media services included in each plan:
Email Marketing
“Many big and small businesses practice email marketing strategies but may lack consistency or expertise to convert potential leads using email,” says digital marketing consultant Divi Fernando. In addition to writing emails for your clients, email marketing services can include analytics and custom reports related to email campaigns.
Google AdWords
With Google’s recent removal of ads on the right side of search results, many agencies are noticing an increase in client requests for AdWords assistance. If your agency isn’t already certified in AdWords and a Google Partner, you may want to consider becoming one. Google Partner status improves credibility with potential clients and raises brand awareness when your agency is placed on Google’s public list of approved partners.
Paid Search (PPC)
While many business owners think only of AdWords in connection with paid search marketing, as marketers you know paid search extends to ads on other search engines and social media ads.
In the screenshot below you can see how Pear Analytics lets potential clients know the comprehensive research and consultation they include with their paid search services:
Google Analytics
Despite Google Analytics being free to setup, it remains intimidating (and time consuming) for many businesses. Similar to AdWords, there is a Google Analytics Certified Partners program your agency can apply for. Setting up the account and adding the code to your client’s website can be a one-time fee, and you can provide monthly Analytics reporting (easy to customize and automate) for the recurring revenue portion. Interpreting the monthly data into marketing suggestions can be packaged in with the reporting or a potential upsell opportunity.
Web Design
In the study Trust and Mistrust of Online Health Sites, participants “were asked to discuss their first impressions of the websites they visited.” You may want to quote these results to your design clients: “Of all the factors that were mentioned for rejecting or mistrusting a website, 94% were design related; only 6% were content related.” Web design affects branding, site traffic, SEO, conversions, and more!
Business owners may think of web design as one-off projects, but it is more cost-effective to make small design changes each month vs. doing a major design overhaul every few years.
Vancouver web design company WittyCookie layouts out the general web design timeline on their website (see screenshot below). This is a great visual to help clients understand the benefits of an ongoing web design subscription vs. one-off design projects.
UX and CRO
“In a monthly retainer package that optimizes conversion rates for your customers’ websites, you can provide services such as heat tracking and click mapping, A/B testing and a monthly report on how user-friendly a site is,” suggests Fernando. This works especially well “for big enterprises or for clients whose business website has a growing number of webpages or functions.”
In their own words, “Draft Revise is a high-touch UX consulting service for websites, billed monthly.” They clearly list out the UX services their clients receive each month:
CMS Tech Support
For clients with big websites “that require platform and infrastructure support and many other associated CMS support queries,” subscription billing is a no-brainer. For agencies that don’t offer this as a specific service, you probably find you still receive CMS tech questions from your clients and resources have to be put towards those questions (even if it is simply the time it takes employees to respond via phone or email that you don’t offer that service). When CMS tech support is part of your recurring revenue stream, you’re paid for the resources used and you provide additional value to clients.
Again, this isn’t a comprehensive list of services your digital agency can be providing via a subscription-based business model. Look at the services you’re currently providing, the ideas presented here, and you’ll notice simple ways to move from project-based billing to recurring revenue.
Let’s review…
There’s a reason so many agencies are moving to subscription-based business models. Some of the benefits we’ve highlighted:
Honestly, most marketing and digital agencies can’t afford not to move to recurring revenue models. Worried about how to handle the subscription billing? Leave that to Maxio, and you’ll be free to focus on growing your agency. If your agency utilizes a subscription-based business model, let us know in the comments below!
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