Gravity Consulting - Jun 29, 2020

Recurring Revenue for Creative Agencies – Part 2

Why turn services into products?

Turning your service offerings into standardized products increases the value of your business. When these standardized products are sold on a recurring basis, you can more easily train staff to both sell the products and perform the services required. This reduces the dependency of the company on you as an owner and allows your company to scale much more easily.
Furthermore, by offering products that can be sold on a recurring basis, you’re increasing the value of your business since recurring revenue streams are predictable and repeatable.

How to turn a service into a product
Identify recurring problems your customers have, and turn your solutions into standardized offerings—or, “products.” A few examples of recurring issues for which solutions can be turned into products by a typical creative agency include monthly content, digital or print marketing requirements; regular social media management; and branding and visual design updates.
What are the key considerations when turning services into products?
It’s worth addressing both your operational requirements and your client-facing features.

Operational Requirements
Specialize in repeatable, trainable tasks for which you have capable staff that can effectively and consistently deliver the product. If you plan to customize your solutions to each client’s specific requests, you risk being unable to deliver. Furthermore, when you anticipate and then try to accommodate all possible client requirements, you end up having people on your staff with skills that are very rarely used.
Consider offering fewer, but higher-quality products. It will be easier to train your staff, and they’ll become very proficient at what they do. A premium product can command a premium price.

Client-Facing Features
Pricing and terms are equally important when it comes to successfully transforming services into products. Consider establishing a recurring monthly fee for your products. This price may initially need to be estimated. For example, if you’re offering an unlimited number of support calls, you’ll need to estimate the number of calls you’ll receive and the number of staff you’ll need to manage those calls. You should ensure the price is high enough to cover your expected costs, and also high enough to attract quality clients. For example, it’s preferable to serve 10 clients who pay $297 per month, compared to 30 clients who only pay $97 per month. You’ll be able to provide these 10 clients a higher level of personal attention.
Always err on the side of charging too much. If you’re looking to attract people to your products, but are concerned that the cost might be off-putting, you can always consider offering a ‘freemium’ package that entices clients with basic offerings but requires them to upgrade to receive premium service.
Also, it’s crucial to establish clear and reasonable service standards. These might include clearly-delineated hours of service, or specific turnaround times. For example, an IT services company may choose to receive calls only during business hours and the early evening. Clients requiring 24/7 support might need to invest in a premium package priced accordingly. Likewise, bookkeeping companies can establish guaranteed turnaround times for filings, based on the number of days required upon receipt of complete supporting documentation.
Where possible, implement client contracts. This is a good way to establish recurring revenues and create operational effectiveness. A good approach can be to have a relatively short up-front contract period, in which you invest in the onboarding process and then move to a month-to-month arrangement.
It goes without saying that it’s important to ensure the services you turn into products are of the highest calibre and are packaged neatly. All the standardization and quality customer service in the world will not help you if your product isn’t optimal.
Standardized service offerings that offer solutions to recurring, pressing problems faced by your customers can be turned into products.
How can this be done?

Consider establishing a monthly price. This price may need to be adjusted through trial and error. For example, if you’re offering an unlimited number of phone calls, you’ll have to estimate the likely number of incoming calls, and the number of staff necessary to handle those calls. You should set the initial price high enough to cover your expected costs, and also high enough that not everyone will pay it. (Otherwise, you might end up deluged and unable to deliver your service obligations).
If you must err on the price, err on charging too much. Then, offer a ‘freemium’ option where something is offered for free. (But no actual phone or e-mail support.)

Terms are just as important as price.
If you charge premium pricing, you have to offer very high value while still outlining reasonable expectations. Some examples of how you can do this are as follows:
Timing: Restrict the number of hours
If you offer technical support, only offer it during certain hours—or offer a premium package that provides service outside those hours. Similarly, you could make it clear that you only work through one issue at a time, although you promise to solve the issue within a reasonable time frame. (What is reasonable depends on the service.)

Turnaround time
If you provide a marketing service, you might guarantee to provide the collateral a certain number of days after you receive all the necessary specifications.

These can work both ways. With a contract, you have guaranteed income for a certain period of time. But if your customer is not happy, insisting on a long contract may not be optimal. A good approach is often to have a relatively short up-front contract period, and then transition to month-to-month.

Financial Requirements
The financial requirements of recurring revenues are important.
For project-based revenue, the cost of acquiring a customer must be amortized over the first project. With recurring revenue, the customer acquisition cost (CAC) will likely have to be amortized over a longer period. CAC is defined as the total direct marketing expenses, plus the salaries of your sales and marketing personnel, divided by the number of customers acquired. If your marketing costs in a month are $10,000, salaries are $20,000, and you acquired five new customers, the CAC would be $6,000. ($10,000 plus $20,000/5.)

The Lifetime Value of a customer (LTV) is defined as the gross profit per customer divided by the churn. (Churn is the opposite of customer retention; it’s the percentage of your customers you lose on a monthly basis.)
Now, assume these customers will pay $2,500 per month, and that your cost of sales is $1,000 which the gross profit per customer $1,500. If your churn is 4 percent per month, the lifetime value of a customer (LTV) is gross profit per month/churn, or $1,500 ($2,500 gross revenue less $1,000 cost of sales)/4 percent equals $37,500.
The LTV/CAC here is $37,500/$6,000, which equals 6.25. That’s a good ratio. Anything over 3 is acceptable.
The key is to measure and manage the key numbers: Customer acquisition costs, gross profit per customer, and churn.

It is a good idea for marketing firms and other creative agencies to develop streams of recurring revenue. The two main reasons for this are, first, because recurring revenue can more easily free up the owner’s time for day-to-day business development, and second, because it will increase the business’s value.