Recurring revenue: models, advantages, & why it matters

Recurring revenue is essential to growing and scaling a profitable MSP. You rely on client renewals to help manage cash flow and forge long-term relationships with clients to help them succeed as they grow.

The question is, how do you create a renewal strategy that leads to recurring revenue streams and client retention? Continue reading to learn about the challenges and resources that can help reduce client churn and build a strong MSP business.

What is recurring revenue?

Recurring revenue refers to revenue that’s generated by regular, ongoing payments from your clients for MSP services. Payment intervals can vary depending on the model you’re using and may be monthly, yearly, or another interval that’s agreed upon by you and your client. This type of revenue is important because it’s predictable, stable, and helps you forecast future financial investments and business needs. 

In contrast to one-time payments, which come from a single transaction for your MSP services, recurring revenue is often based on a subscription service, a long-term contract, or a retainer fee that guarantees a set amount of revenue for a given time period. 

Businesses of all kinds can benefit from using a recurring revenue model, but it can be especially important for those that offer ongoing services like MSPs.

Recurring revenue model types

There are several recurring revenue models used by businesses. The recurring revenue model you choose for your MSP business will depend on factors like the services you offer and your clientele. There are various types of recurring revenue to consider:

• Subscription model: Your clients will pay a regular fee for specific services like cloud-based services that offer data storage, backup, and computing. 
• Security-as-a-service model: A security-as-a-service model allows you to charge clients a set, regular price for certain service related to management of their IT systems. 
• Long-term contracts: In a long-term contract, you and your client agree upon services, associated fees, and other terms over a set amount of time. This can benefit your clients by locking in a set price for MSP services for that agreed-upon time while giving you the assurance that you’ll receive recurring revenue from this client, with the potential to renew when the contract ends. 
• Maintenance model: Your clients will pay a regular fee for ongoing maintenance and support services like IT or technical support. Think of this as a middle-ground between the conventional, reactive “break-fix” style of maintenance and a more proactive version. This may not be as comprehensive as a long-term contract; however, it can still provide a source of recurring revenue and an opportunity to add on services in the future. 
• Retainer agreement: A retainer fee is paid in advance to your business to secure your MSP services for a set amount of time. It’s typically paid at the beginning of the engagement with your clients and intended to cover the initial costs and expenses associated with the work.

Both recurring revenue streams and project- or task-based revenue can be useful for your MSP business; however, recurring revenue offers more predictability and stability over the long term, and helps you build strong client relationships that can support your business growth and profitability. 

Project- or task-based revenue is generated from a one-time service or engagement like a consultation on IT services. You may be able to generate revenue this way, but can’t rely on it as recurring revenue. 

Benefits of recurring revenue for MSPs

Managed service providers can experience the following benefits from implementing a recurring revenue model:

• Predictable revenue: Recurring revenue provides MSPs with a more predictable, steady cash flow. This can help MSPs to plan and invest in their business with greater confidence and scale in a sustainable way.
• Client retention: Recurring revenue models typically involve longer-term contracts or subscriptions, which help retain clients and reduce churn by incentivizing them to continue using your MSP services. For more information on improving your client retention rate, check out our client retention cheat sheet.
• Long-term client relationships: Recurring revenue models enable MSPs to build stronger, long-term relationships with their clients in which they truly understand their client’s needs and provide more value through additional services or upgrades over time. Building credibility and fostering trust with clients is particularly important because of competition in the MSP market. If a client trusts your business, they are more likely to continue the partnership than switch to a competitor. One repeating method to build that relationship with clients is QBRs (quarterly business reviews). These allow your team to showcase how your work is contributing to overall client goals over time.
• Improved business performance: With a predictable and stable revenue stream, your team can focus on improving their business operations and providing better services to clients. Over time, this may lead to improved performance and increased profitability, which can allow you to hire more staff to support clients.
• Scalability: Recurring revenue streams can help MSPs scale their businesses more efficiently. As their client base grows, so does the potential for recurring revenue, which allows MSPs to hire additional staff, look into outsourcing, implement automation, and invest in resources to build a strong, profitable business. For more information, look at our eBook, How MSPs Can Profitably Scale.
• Reduced costs: Selling services to existing clients is generally less expensive than trying to acquire new clients. Existing clients have already developed trust in your business and services and may be more likely to try new service offerings or upgrade based on their positive experiences with you. Selling to existing clients doesn’t require additional sales and marketing resources since you have already retained the client. In contrast, it can be far more costly to invest in marketing, advertising, and labor to acquire new clients. 

Recurring revenue examples

Growing revenue via new solutions is important for MSPs. Recurring revenue sources can help keep your cash flow healthy, allowing you to invest in the best tools, software, and staff to build strong partnerships with your clients.

To build credibility with new and existing clients, you’ll need to offer different services that provide value to clients and represent how essential your MSP services are to their business. If you’re just starting your MSP business or are looking for new ways to generate revenue, the following examples of recurring revenue may be helpful: 

• Monitoring and management services: Unified monitoring and management (UMM) software uses automation to save you time while providing exceptional MSP services to your clients. With excellent UMM software, you can quickly resolve issues, detect problems, connect to remote endpoints, and recover valuable data, which will save you and your team time and money, while preventing downtime and profit loss for your clients. 
• Cybersecurity management services: You can add value to your MSP service offerings with cybersecurity management that protects your clients’ critical business assets. Security offerings can include:
• Endpoint detection and response (EDR)
• Security information and event management (SIEM)
• Risk assessments
• Cloud app security
• Security policy management
• Cloud support services: With more and more businesses relying on cloud-based services, there is an opportunity for MSPs to provide support in managing the cloud to prevent downtime or cyberthreats. Services may include the implementation of applications, training end users, data backup, and disaster recovery. These may be software as a service (SaaS) offerings, which are often subscription based, providing you with the recurring revenue you desire to build your business. Another area of support is cloud billing, helping your business get paid faster and streamline accounting.
• Mobile device management: MSPs can provide mobile device management services to help clients secure and manage mobile devices used by people in their organization. These services are typically provided on a monthly or annual subscription basis.

These are strong starting points for your business to start building its recurring revenue, but it’s also important that you implement them the right way. For more information on this, check out our webinar, Ultimate Guide to As-A-Service.

Challenges and considerations for recurring revenue

While recurring revenue models can provide many benefits for MSPs, there can be challenges to implementing recurring revenue streams:

1. Customer acquisition costs: Implementing a recurring revenue model requires upfront investment in marketing and sales to acquire new clients. These costs can be significant, particularly in the early stages of building a client base; however, as you retain more clients, these costs will go down.
2. Service delivery costs: Providing ongoing services and support to clients can be expensive, particularly if you are providing 24/7 support. When setting up a pricing structure for recurring revenue streams, be sure your pricing model adequately covers the cost of service delivery while still being competitive with other MSPs.
3. Client churn: One of the biggest challenges of recurring revenue models is churn, or when clients choose to end the partnership with your business, resulting in the need to prospect business. Your team must ensure that they are providing high-quality services and support to clients to encourage client retention. By working on increasing renewal rates, along with retention rates (the number of clients who retain your services for the entire contract), you can build strong client relationships and positively impact your bottom line.
4. Evolving technology: Technology is constantly evolving, and MSPs need to ensure that they are keeping up with the latest trends and advancements to remain competitive. This can be a challenge for smaller MSPs that may not have the resources to invest in the latest technologies.
5. Scalability: Recurring revenue models can provide predictable revenue streams, but they can also be challenging to scale. As the client base grows, MSPs need to have the resources and staff in place to handle the increased demand from clients.
6. Contract management: Managing contracts and billing for recurring revenue models can be more complex than one-time purchases, particularly if you are providing multiple services on a subscription basis. MSPs need to have effective processes and trained staff in place to help manage contracts and billing associated with recurring revenue. For more insight on how to manage contract management and other business processes, check out our webinar, Driving Revenue: Quote to Cash with ConnectWise Business Management.

It can be helpful to take time to create a solid MSP business model that clearly identifies your core offerings and ideal clients so you can be sure to provide services that are relevant to their businesses. This can help you save time and money by helping you stay focused on what you do well rather than trying to be everything for every client. 

Best practices for managing recurring revenue

A few best practices to help manage recurring revenue streams include:

• Creating value propositions that clearly define how recurring revenue streams add value for clients. This may include identifying the specific benefits that their services offer to clients, such as increased efficiency, cost savings, and improved security.
• Defining service levels like the scope of services, response times, and escalation procedures. Clear service level agreements (SLAs) can help to manage client expectations and ensure that MSPs are delivering high-quality services.
• Using automation to streamline service delivery and reduce costs. Automation can help to manage routine tasks, such as patch management and backup, and can free up resources for more complex tasks. This can also help your internal operations via professional service automation software. Building a culture of automation can show clients how effective automated services can be for their business, if they are concerned about making that jump. 
• Monitoring the performance of your MSP services and systems to ensure that they are meeting client expectations. This includes monitoring network performance, application performance, and security threats. Regular performance reviews can help MSPs to identify areas for improvement and maintain high levels of service quality.
• Tracking key metrics like client profitability, customer satisfaction, and NPS, to monitor the health of their recurring revenue business. These metrics can help MSPs to identify trends and make informed business decisions. KPI tracking solutions can help simplify and automate this process.
• Communicating regularly with clients and other stakeholders to ensure everyone is informed of service updates and changes. Regular communication can help build trust and ensure that clients feel valued.
• Understanding customer sentiment to be able to gauge how satisfied they are with your team and services at any given time. Customer feedback solutions are essential to help your team take action before a client is upset enough not to renew.
• Innovating and evolving services to remain competitive like investing in new technologies, developing new service offerings, and adapting to changing client needs.

MSPs can benefit from adopting business management tools that enable efficiency and streamline operations to help you grow your revenue. Professional service automation (PSA) can be a game changer for your business by centralizing help desk, project management, finance, and more into a single solution. 

Check out ConnectWise’s professional service automation demo to help set your business up for growth and profitability today.