Recurring revenue in a services business is revenue that arrives again next month without being sold again, under a contract the client has to act to stop. The definitions written for software do not transfer to a services ledger. Annual recurring revenue, monthly recurring revenue and the rule of 40 assume a product that costs nearly nothing to serve one more customer and a subscription that renews unless someone cancels it. A managed service carries delivery cost every month, a retainer can usually be ended on notice, and a repeat project is not recurring however loyal the client. A productised (productized) service is not automatically recurring either; it is a fixed scope at a fixed price, and it only recurs if the contract says so.
Why the SaaS vocabulary misleads
Founders of consultancies, agencies and managed service providers borrow the software vocabulary because it is the only one on offer, then find that their bank, their board and eventually a buyer each count the number differently. The same ledger genuinely supports several readings.
| The SaaS habit | What it hides in a services firm |
|---|---|
| Counting anything billed monthly as MRR | Retainers on thirty days’ notice, and repeat projects invoiced in monthly instalments |
| Multiplying a month by twelve to get ARR | Contracts that end mid-year, and managed services whose fee is designed to fall |
| Treating recurring revenue as near-pure margin | Every recurring pound has people cost against it, every month |
| Growth plus margin as the health measure | Growth in a services firm is bounded by hiring; the recurring share of revenue is the number that changes what the business is worth |
How the pages fit together
The cluster has a counting half and a building half, and they are best read in that order.
The counting half starts with the glossary definition of recurring revenue, which sets out the four readings. The playbook on counting recurring revenue four ways takes each reading in turn, shows how far apart they can sit for one business, and says which one diligence counts. The recurring revenue counter is the companion tool: ledger in, four readings out, so you see your own spread rather than guess at it.
The building half is about the two contract shapes that create recurring revenue in services. The guide to the monthly retainer covers the shape most agencies and consultancies reach for first: a fixed monthly fee for a defined scope, and how to keep the scope defined. The guide to pricing managed services and the MSP pricing model playbook cover the shape that turns a consultancy into an operator: a fee per unit the client can count, priced so that improving the client’s estate makes sense for both sides. The course on building recurring revenue in a consultancy or agency is the sequence for moving a project-led firm towards those shapes without breaking its cash flow.
Read the counting half first. A firm that cannot say which reading it is using will build the wrong thing, usually retainers that read as recurring in the management accounts and as project work in a data room.
The house position
Count recurring revenue the way a buyer will, not the way that flatters the monthly board pack. Know the spread between the generous reading and the strict one, and manage the business on the strict one. A retainer is recurring only to the extent that its notice period and its scope make it so. A managed service is the strongest recurring revenue a services firm can build, and it is also the hardest to grow faster than the project work that feeds it. Recurring revenue does not have to be solved before margin is; the two are different jobs, and the second is usually available sooner.
Where this comes from
In our first year running the business that became DevOpsGroup, a services company helping other businesses build and run software, Steve and I were told to aim for a company that was mostly recurring revenue on long contracts. I understood the advice immediately and spent the next eight years finding out how much harder it was to build than to understand. I knew the recurring number every month; it was on the wall. The managed services line was real and it grew, but the project work it was attached to grew faster, so the share moved more slowly than the machine built to move it. That gap between seeing a number and being able to change it is why this cluster starts with counting.
The stories are drawn from my notes, diaries and recollections and told in the newsletter as they publish. The playbook, the counter and the course are in development, and each page carries a waitlist.
Playbooks and tools
- How to count recurring revenue in a services business, four ways: The same business reads as a different company depending on the numerator. Four readings from one ledger, and the spread between them.
- MSP pricing model: price managed services per application: When your fee is a proxy for the customer’s spend, you get paid more when they do worse. How to price per unit of responsibility, with a fee designed to fall.
- How to build recurring revenue in a consultancy or agency: Take a project-led services business and rebuild it around revenue that repeats. Pricing, packaging, delivery model and the sequence to move without breaking cash flow.
- Recurring revenue counter: four readings from one services ledger: Four readings of your recurring share from one ledger and one period, with the spread between them.
Guides
- How to price managed services: per user, per device, per cent of spend, per application, and a fee designed to fall: The unit you price a managed service on decides whose side of the table you sit on. This guide compares the five common bases, argues against pricing on a proxy for the customer's spend, and sets out application tiering with a fee designed to fall.
- What is a monthly retainer? How consultancies and agencies structure and price one: A monthly retainer is a fixed fee paid every month for agreed access, capacity or an ongoing service. It is the first step most consultancies and agencies take from project revenue towards revenue that repeats, and it is easy to price badly.
Definitions
- productised service: A productised service is expert work packaged with a fixed scope, a fixed price and a repeatable delivery process, so that a client can buy it without a proposal, a discovery call or a negotiation over hours.
- recurring revenue: Recurring revenue is income a business expects to receive again next period without selling it again. In a services firm it comes from retainers, managed services and support contracts, and its size depends on which of four definitions you count it by.
- services business: A services business (service business, professional services firm) earns its revenue by selling the time and expertise of people rather than copies of a product. Revenue is bounded by headcount, rate and utilisation, which is why product-company advice misleads its founders.