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Your Revenue Growth Guide for Your Monthly Recurring Revenue Business
This is a proven revenue growth formula I teach as part of my Fractional Chief Revenue Officer service. It combines the 3 levers that any recurring revenue client service business can control. These 3 inputs can drive revenue and profit growth without expensive marketing or infrastructure. They are:
Retention
Margin
Referrals
Who Should Read This?
If you are a B2B (business to business) or a B2C (business to consumer) business and your business drives the majority of revenue through subscriptions or ongoing retainers, this guide is for you. If you're the owner, the Second-in Command, or any leader you can use this guide to set a true north star for intentional growth.
What is a Client Service Business?
A client service business is a business that provides services to clients on a recurring basis, with a focus on meeting the needs of the client and helping them achieve their individual goals. The needs of the client are at the center of all activities, and the business must have a deep understanding of the client's needs, preferences, and expectations in order to provide tailored services
Examples of client service businesses include accounting firms, martial arts schools, law firms, digital marketing agencies, and consulting firms.
What is a Monthly Recurring Revenue (MRR) Business?
A monthly recurring revenue business is a type of business where the company generates revenue on a regular, ongoing basis from a single customer or group of customers. Usually, these fees are drafted monthly and are a similar amount month to month.
Examples of recurring revenue sources are: Subscriptions, memberships, or service contracts, among others.
How Do You Grow a Client Service and Recurring Revenue Business?
No matter where your business is in it's growth cycle, understanding how these 5 elements work together are critical to your business achieving its goals. If you focus on understanding and improving these elements in the order laid out, your business will grow.
Element #1: Retention - The number of clients and/or revenue you consistently (and predictably) retain month to month or year to year.
The most important number or key performance indicator (KPI) is retention. You must know the attrition of your clients and revenue. For every client that is lost, you must replace it before you can start growing again!
Imagine this scenario. You run a client service business with 500 clients, each paying you $200 a month. On average your client will retain your services for approximately 10 months. With 500 clients, if you can extend the average duration of your clients by just one month (from 10 months to 11). You will realize an additional $100,000 in revenue! Without paying a dollar to market! Leveraging the same infrastructure and your likely benefitting from an improved economies of scale (same amount of electricity to keep the lights on if they stay 10 months or 11 months). Here's a free worksheet for you to explore the impact of retention on your business.
For the most part, this "new" revenue goes directly to profit! Likely, if you're reading this guide, you've done some work to calculating it but aren't managing based on it.
There are many ways to measure retention. but the simplest way to do it is to have an accurate number of active clients at the start of each month, the numbers of new clients you gain each month, and the number you lose each month.
Retention Percentage is 1 minus the number of clients lost divided by the number of clients that start the month times 100.
Clients Lost In the Last Month: 3
Clients Started Month With: 90
(1 - (3 / 90)) * 100 = 96.67% Retention
Beware stopping there! This could become a vanity metric. More ahead in Element #3.
Element #2: Margin (Profit) - What percentage of each dollar generated goes to you versus providing your service?
You didn't start your business to lose money. You started your business to serve your clients using your special expertise and provide for your family and yourself.
Client service businesses have some interesting nuances. Traditional commodity products like grocery stores, gasoline, or other mass consumed products have low margins. Service plays a factor but it isn't easy to generate profit.
In a service business, people will pay more for a high quality service! You have a lot of control over the quality that you serve your clients! But the best way to manage margin, is to pay yourself first. If your personal goals are clear, you'll know what you need from your business to life the lifestyle your desire.
Your equation becomes simple:
Pay yourself first, want $20,000 in income a month? Put that aside first.
Next, set aside money to pay tax
Reserve, dollars to reinvest in the business
Finally, the rest can be for expenses
Now, if your business would run out after paying yourself first, you've got to take a close look at your expenses and/or retention. Those become the catalyst to changing your ability to grow and provide for your family!
Element #3: Referrals - Are your clients helping drive new business, or are they apathetic.
The majority of business owners I know, truly offer an incredible product and service. They bend over backwards, flexing themselves until the breaking point (and sometimes they do), to take care of their customers. They spent the majority of their lives building their (or preparing) to build their business. They aren't lacking in effort or intent to do well!
But, deep down, and there's a spot they won't want to admit, openly, but there are gaps in their service. Those gaps arise when...
There's a client that is tricky
You're trying to share the load with a new team member.
You're overloaded and you're trying to do too many things at once without help.
The honest truth is that all early phase client service businesses become capped by the number of relationships the leader can personally manage...
The only way to overcome this limitation is to design a process to deliver high quality customer service that is simple and repeatable. One that has a manufactured genuineness and is executed consistently to match the customer's needs. This now high quality, reproducible service, will be come a referral engine.
This system will:
Reduce the burden on the owner/leader's individual contributions
Increase the duration of your clients (increase revenue)
Reduce your marketing budget (you need less new leads)
And sales is easy (warm referral leads are much easier to close than cold leads)
This guide to growing your membership or subscription B2B or B2C business can't be changed over night. It requires a consistent application of the above principles. It will seem easy and obvious at first, but rarely is it. The limiting factor, is almost always the habits of the owner/leader. And no matter how great the intent, those aren't easy to change. If you need help, just call.
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