Monthly recurring revenue is all the rage these days, seen as the holy grail. But what most freelancers and agencies don’t necessarily realize is that it can cause problems. David C. Baker joins me to talk about 9 ways recurring revenue actually hurts your business and what to do instead.
David C. Baker is an author, speaker and advisor to entrepreneurial creatives worldwide. He has written 5 books, advised more than 900 firms, and keynoted conferences in more than 30 countries. His work has been discussed in the Wall Street Journal, New York Times, Fast Company, Forbes, USA Today, BusinessWeek, and Inc. Magazine. His work has also been featured in the New York Times, where he was referred to as the “expert’s expert.”
He lives in Nashville, Tenn., but grew up in Guatemala, where he lived with the K’anjobal, a tribe of Mayans in San Miguel Acatán, Huehuetanango, where his parents did medical and literacy work.
David helps entrepreneurial creatives make better business decisions about their positioning and marketing, how they structure their roles in the firm and how to benchmark their financial performance. His most recent book is called The Business of Expertise: How Entrepreneurial Experts Convert Insight to Impact + Wealth. He co-hosts the most listened to podcast in the creative services field, called 2bobs. He can be found at davidcbaker.com.
Colleen Gratzer: Bienvenidos, David. It’s so great to have you here!
David Baker: Thank you. I’m really glad to be here. This should be fun. I’ve been looking forward to this topic, although it’s not going to be the warmest conversation for some people.
David: I think they might find that they disagree a fair bit, but at least it’ll challenge them some. So yeah, I’ve been looking forward to this.
Colleen: Cool. So can we talk a little bit about Guatemala first? What was that like?
David: Have you been there, by the way? Have you visited?
Colleen: No. I’ve been to Mexico, but I can’t do planes. I mean I’ve been on planes just a couple of hours, but I don’t like flying, so I can’t go to any of the places that I studied.
David: Yeah, it’d be a long drive.
I was 4 when we went and I don’t remember that first year. I do remember when I was 5, and I didn’t come to live in the U.S. and didn’t really go to formal school much until I was in 10th grade.
It was great because I didn’t feel deprived of anything. It was fantastic. I would take correspondence courses. I’d finished school up in two and a half months or so. Then the rest of the time, I could just explore the country on a motorcycle.
Where we lived was very, very remote. So we had no electricity, no running water, no stores, no gas stations, and barely roads.
David: It was fantastic. I’m a U.S. citizen. I love this country, but I don’t think this country is the center of the world, and it’s given me a really fascinating perspective about just trying to make the advice about life and about business a little bit more applicable than just what works in our small environment.
So it’s been great. I’ve actually been to 42, 43 countries coming up in a few weeks.
David: Of all the things that I’m able to do—the freedom that I have because of money and scheduling and so on—I think travel is the most important thing that happens there. I’m just really grateful for it.
Colleen: K’anjobal, that language is spoken by 80,000 people, I looked up, in Guatemala.
David: Yeah. Well, and more than 5,000 of them in Los Angeles.
David: They migrated during a very difficult time in Guatemala’s political history in the 70s. They moved en masse to Los Angeles. So there’s a very large collection of folks from the K’anjobal tribe that live up there as well.
Colleen: Oh, wow. And you’re a dog lover, which I totally appreciate.
David: You’re a dog lover as well?
Colleen: Oh yeah. We do a lot with animal rescues and I saw your dogs on Instagram and they’re so cute.
David: Yeah. My wife is at the point in this puppy’s life where she’s not sure that loving dogs is a great thing in life because he’s not trained yet completely.
I got home last night from a long trip and she told me that the dog had been missing me and she’d already gone to bed when I got home. When I slipped in, it was after midnight. Loki is his name. He started barking, didn’t know who I was. When he saw me, he just turned into a crazy animal, just jumping all up in the air and scratching me all over.
But, yeah, dogs, yeah. If all the people in the world disappeared, I’d probably be okay with that as long as I still have dogs.
Colleen: Absolutely. Yes. I have to have a dog in my life every single day. I’ve always had a dog—lots of them at some points.
David: A lot of your listeners, they have environments where they welcome dogs at shops too, which I find to be a really great thing about this industry.
Colleen: Yeah, absolutely. So did yours come from a rescue or a shelter?
David: Yes. All of the dogs we’ve had have been rescued. One of them was supposed to be a show dog and its registered name was Princess Blaze of Hunter.
David: But it turned out not to be a very great show dog. So we adopted Blaze as well. So Yep. Every dog we’ve had of… We like rescuing the strange mutts—
Colleen: So do we! Yes, we always go with for the ones that are older or have the medical problems or the behavioral issues.
Colleen: Oh my gosh. That’s so funny. I love that. So I want to know how does it feel to be called “the expert’s expert”? That’s quite a title.
David: Well, you know, at first, I was absolutely thrilled. I went and changed all my profiles and because it’s in the New York Times and you want to take advantage of that.
David: The more it sat there, its feel a little pretentious, just honestly. I do think it’s true. I can humbly say I do feel like I do help x for a living and I feel like I should provide a lot of value but it also feels a little bit pretentious.
It feels pretentious, just like using my middle initial all the time. But the only reason I do it is for SEO purposes.
But I’m grateful. That kind of press certainly helps you, and you’d be crazy not to take advantage of it.
David: I also feel like I’ve worked really hard to try to develop the sort of IP [intellectual property] that will help experts and so on grateful for that opportunity.
Colleen: How did you get into helping entrepreneurial creatives to begin with?
David: Well, it was really strange. It was so accidental because I owned a firm, just like your listeners. It was a small firm of 16 people.
Colleen: Small? Of 16 people?! That’s pretty big.
David: Well, yeah, I guess it is in some ways it is. Right.
But as part of that, I subscribed to a newsletter and part of the deal was that you got to talk to the editor from time to time. That was his way of staying in touch with the field if he got calls from his subscribers. I would call him and we would chat.
Then one day, I said, “Hey, why don’t you provide advice to your readers? I think they’d be hungry for specifically applicable advice.”
He said he wasn’t interested. He had his reasons for that, which were very legitimate. Then he said, before I could even pause, why don’t you do that for my readers? That had never occurred to me.
Then he said, how about if I put an ad in my newsletter and you just give me 10% of whatever you make? I thought, okay, I can’t lose anything here. I didn’t think anything would happen either. Nothing would come of it.
But actually people started to call. So I started to work with firms and, over a very quick, compressed six months of time, I found my life just changing very quickly, where I was working with my peers and drinking from a fire hose, learning what was working their situations, and then passing that along.
It was somewhat accidental, but that was 25 plus years ago now.
I’m on your email list. I’ve been on your e-mail list for a very long time and you recently wrote about recurring revenue. It got my attention because what you said is so contrary to what most people are saying about it. I’ve only heard that same opinion from one other person.
So when you said something about it, I was like, I have to talk to you about this.
But first I want us to explain what you call MRR, monthly recurring revenue.
David: What that is is instead of just looking for specific projects from a client, and actually instead of just looking for a retainer relationship, you’re looking for a relationship with a client, a new client that starts at a certain level, and every month the same amount of money crosses the transom and you’re doing pretty much the same things for them.
There are a few exceptions, but you’re doing the same things for them on a monthly basis, and there’s no particular end in sight. I mean, maybe it lasts for a year and then it’s renewed for another year.
So it’s just saying, okay, instead of a $60,000 project that might take me x number of months, I’m going to look only for relationships where there’s some minimum and usually that minimum is $3,000 or $4,000 or $5,000 and it might go up to 10 or 15 or something. And it’s just: So I’m just going to layer all these MRR clients on and it’s going to make my business easier to manage.
That’s monthly recurring revenue, and it’s something that has always been a part of the discussion since the 70s. It was more called a “retainer” back then, but it started to surface again about six, seven years ago with the advent of digital firms, particularly if the stuff they were doing for their clients needed constant attention—SEO kind of work or paid digital advertising or something called “growth-driven design,” where you’re constantly working on a website, you’re not building a website, you finish and then you move onto something else. You’re just constantly improving it
So that’s the concept. It’s a newer concept and it just like so many of these things, it’s a pure fad and some fads are good, some fads aren’t. This one hasn’t been thought about very, very briefly, but it’s like the holy grail of principles: “If I can get my monthly recurring revenue up, all of a sudden I can relax.”
Colleen: Right. I know a lot of people that are applying this in the form of a website support plan every month and others that are doing the design of social media images for clients every month, those kinds of things too.
David: Right. Yeah, exactly. It falls under… They almost just don’t pay as much attention to clients who aren’t willing to enter into that recurring revenue arrangement with them. They just kind of pass over them.
I see the advantages of it. But I think mainly it comes with many disadvantages, and I wish we could get out of this love of monthly recurring revenue relationships.
Colleen: Well let’s go over the pros.
David: Sure! And the pros are easy to list, and nobody disagrees with them.
Like, okay, if I’ve got this level of staff, then I need this much revenue and now, all of a sudden, it’s easier to not only budget what’s going to happen from a cashflow standpoint, but it’s easier to figure out what kind of staff I’m going to need.
David: So when I increase my monthly recurring revenue by x number of thousand, I’ll be able to afford the next developer I need or the next designer or writer or something like that.
A lot of the benefit seems to be around either making it easier to manage the firm or to relieve some of this pressure of constantly having to find new clients who are willing to give you projects.
It feels to them anyway—I don’t think this is true, but it feels to them—like rather than solving the same issue over and over again, they’re trying to bring a bigger solution to the table so that they don’t need to constantly sell.
They just look for a few bigger, more steady relationships rather than lots of projects from smaller clients.
Colleen: And some people would say, “Oh, well, having this recurring revenue is going to make my business easier to sell one day. It’s going to be more attractive to a buyer.”
David: Well, to the unsophisticated buyer, that’s absolutely the case. When you have an unsophisticated buyer, one of the first questions they’re going to ask is, let me see the arrangements that you have with your clients because they want some assurance that after the sale closes that that client revenue will continue. They think that having these MRR relationships in writing makes it safer. And it’s simply not true.
Sophisticated buyers know that for the last 20 years, you don’t look at how standardized client relationships have been. You just say, “Listen, it’s been a project basis for years and years and years. But what we can show you is that, in spite of that, we’ve maintained a certain level of revenue and even without these monthly recurring revenue relationships.”
So sophisticated buyers don’t care about that. Unsophisticated buyers do care about it.
Colleen: Okay, so let’s dig in. Let’s get into all the cons of MRR.
Problem #1: Not Driving the Relationship
David: Yeah. Well, the one that troubles me the most is that you become frequently an order taker.
David: Sort of like a restaurant. They give you a card that says, okay, you could spend $50 at cracker barrel and—
Colleen: Oh, that’s a great analogy.
David: You’re in charge, and the restaurant is obligated to give you whatever you want up to 50 bucks. You are not driving the relationship as much as fulfilling a contract. And it puts you into this… because MRR by definition is looking to even out the deliverable for the client and make it a little bit more steady, which screams “implementation.”
In the real world, clients need different things at a different pacing. Their life is changing regularly and rather than having…
It’s sort of like, you know, the highest paid surgeons are the ones who do something for you when something specific comes up in your life. It’s not the ones where you go visit them twice a year, like a dentist for preventive maintenance, and—
Colleen: So true.
David: When you have a steady plan like this, it screams “implementation.” It doesn’t scream like, “Wow. This is an expert that’s solving a big problem with some time sensitivity that I have right now.”
Colleen: Yeah. Okay.
Problem #2: Overservicing
David: Another con really is the whole overservicing things. When you have a client who takes longer to decide if they want to use you in this monthly recurring revenue relationship… There’s some resistance on their part. It seems like it’s not just a project they’re buying, but it just feels like a long sort of never-ending commitment that they’re making.
David: To help allay the fear they have, they say, “Okay, if I’m gonna make this big of a commitment to my agency, my design firm, then I’m going to expect a lot from them. I don’t want to hear, ‘Oh, we can’t get started on that by Tuesday,’ or ‘We can’t stay later today to get that done’ because—they may not say this, but they’re thinking—“You realize we are paying you this much money every month.” It’s like when you have a bill from Comcast—
David: And every month, you’re sending them $183 and then it stops working and you’re pissed off. You’re more pissed off because of this entitlement mentality that comes with a regular thing.
As humans we, if it’s not episodic, if it’s regular, then our expectations are tuned up significantly.
David: So that’s part of all this overservicing, that it tends to bring to the surface… Because the client is already on edge.
You’re already pressing the envelope by asking for all this money every month. It’s not tied to results. It’s not tied to specific projects.
Colleen: Yeah, that makes sense.
Problem #3: Filling Up Time
David: Another con is that… And this, of course, is up to the agency. It’s not necessarily…You could certainly mitigate this on your part, but how does it make sense for you if you’re doing SEO work, for instance, you can say, “Okay. I need to spend $4,000 for a client and then when the time runs out, you can stop.”
But with some of these other arrangements, the work isn’t quite like that. Time is not a renewable resource. Let’s say that there’s really only $3,300 worth of really valuable work that you could do for the client right now, but you’re not sure like, “Well, they kind of paid for $4,000, so we need to fill up this extra $700.”
You don’t necessarily do the most valuable stuff for them, but you feel obligated to keep working for them.
Then in another month, because of what’s happened—it’s episodic in this case—but the payment is still flat at $4,000, they need even more work. And you’re saying, “Well, I set aside $4,000 worth of time for you and you need more. And time is not a renewable resource. So even though we didn’t necessarily use up all the retainer from last month, we, we really can’t bank this.”
It’s not like cell phone minutes. So there’s all these little tensions that, that sometimes are just private, but at other times they flare up, and the client doesn’t understand why they’re paying you all this money and you can’t make an exception about that.
People have different policies to solve this. I think there are some ways to solve this well, but in most cases, agencies are kind of stuck with overservicing or at least not necessarily doing their best work, but just filling up the time that the client is paying for and that particular month.
Does that make sense?
Colleen: Yeah, it does.
Problem #4: Selling Time
David: One of the biggest challenges about the monthly recurring revenue is that it’s as far away from value pricing as you can get.
David: So yeah. It’s time. You’re selling time.
One of the things that surprises me is how many firms who are dying to have monthly recurring revenue, and to some extent they’re successful at that. So maybe two-thirds of their relationships are under that sort of an arrangement. How they’re still giving away time. How in the world is that even possible if you’re able to charge your clients for every bit of time you’re spending, how is it that you’re still underpricing and overservicing work?
And that’s a fairly complicated answer but at the end the best you can do is to get paid for all the time you’re working.
So there is no mechanism in a monthly recurring revenue arrangement for you to do value-based pricing. Value-based pricing would be more… It’s a little bit bigger than package pricing, but there’re some similarities.
So with packaged pricing you’re saying, we have this thing we do for our clients, whether it’s a diagnostic or something and it’s $12,000. But if you added up the number of hours it takes to do that, it’s really you’re making more money than than what it looks like.
But if you’re under a monthly recurring revenue, you’re under an obligation to not overcharge the client. So the best you can do is to get paid for all your time. You can’t get paid for more than that. You can’t expand that relationship into a value-based pricing.
Problem #5: Interference
David: Another con here is that there’s more disclosure to the clients. At a very minimum, they have a right to look into your business about your timekeeping records. Then sometimes, it gets even worse than that.
Sometimes they’ll look very deeply into who’s doing the work, and they may say—and it’ll go in either direction. They may say, “Well listen, couldn’t we get more done if you assigned a less-expensive person here?” or “I don’t want the work from this less-expensive person. I want the higher level to be working on this.”
They almost feel like they have this right to sort of dig around in how this is happening as opposed to relying on you, the expert, to do what’s best for the client. They feel like they have this right to interfere a little bit because of this hourly relationship, and they sometimes do.
Colleen: I wouldn’t like that I’m running my business. Not you.
David: Yeah. Right.
Problem #6: Entitlement
David: Another pretty significant reason why we should be wary of these relationships.
It’s more of a psychological one and it’s hard to kind of put in a spreadsheet, but when you have a typical relationship that’s going bad, if you notice it fast enough, you can step in and figure out what’s at the root of it, have a candid conversation and save it.
When a relationship under a recurring revenue payment schedule starts to go bad, it tends to spin out of control much faster. The reason it does is because they are ready to be pissed off much quicker because they feel their expectation level is really high because they’re writing you this monthly check and they feel like, geez, they’re looking for any sign that they’re being ripped off or any sign that you’re not being as responsive or something.
When something goes bad in the relationship, whether it’s your fault or their fault or a mix of that, it goes bad much quicker and is much harder to solve, because you’re not earning everything that you’re getting paid for in their mind.
It’s more of an entitlement.
David: It’s sort of a welfare check. You just make some bad assumption about whether somebody is earning it or not. That’s sort of what I mean there.
Problem #7: Lack of Innovation
David: Another is just that it’s harder to be as excited about innovation from a client. Rather than reinventing what you’re doing for the client, you tend to do the same thing every month because the payment is the same every month. So you repeat.
When people lose a relationship with the client, they often lose it because the client feels like you are not bringing new ideas and new leadership, new innovation to the account. When you have a very similar steady relationship from month to month, it’s easier to slide into a little rut, so to speak, and not shake things up, bring new ideas and keep assuming that—it’s basically called zero-based marketing—trying to come to the account as if you are trying to win it from somebody else.
You’ve already got it. You feel safe. You’re getting these monthly checks and you just don’t press yourself to be innovative. So that’s another thing to think about too.
Colleen: Isn’t that kind of like the saying “New is better than best,” or “Different is better than best”? Like somebody else, another firm, another freelancer could come along and have these new ideas—
David: Yeah, right!
Colleen: Then they’re like, “Oh, well, they’re different and they’re offering us something new.”
David: Yeah, and one of the things they are going to say is “Look at this firm there. They’re doing the same thing for you every month. When’s the last time they brought a really new idea to you?”
Now, obviously, you could still bring great new ideas to clients, but when you fall into a monthly familiar relationship, it’s pretty easy to take the client for granted because you already sold them and you’re off looking for the next big hunt. You’re looking for the next big client to bring in, and you’re leaving the existing client relationship—that you think you’ve already sold—to your implementation people, who are not being super innovative about re-earning that account.
That’s what I mean.
Colleen: Good point. Yeah.
Problem #8: Discounts
David: Some clients… Now, this isn’t always true, but actually it’s pretty common. A client in exchange for promising to give you x amount of work a month.
They say, okay, what are you going to do for me? Because they sense that you really want this relationship and they say—and rightfully so—okay, how much is this worth to you? Are you willing to give me a discount if I promise this much amount of work for you?
David: The problem with the discount is that your costs aren’t less.
David: The only lesser cost you have is basically from a sales standpoint, which is not in your best interest. Giving them a discount because they’re promising a regular amount every month, it just kind of simply comes from profit.
Very few firms, especially the ones that are dying to have these monthly recurring revenue relationships, are willing to stand the ground and say, “No. That’s not a correct expectation.”
What the correct expectation for a relationship like this is that you are signaling to us that we are going to be a critical partner for you and that we are going to be incentivized to think about your business all the time without having to think about starting and stopping projects and so on.
It’s not about greater efficiency. It’s not about making less money. It’s about defining the relationship differently. It’s also about us promising to reserve a certain amount of capacity on your behalf. It’s not about getting that capacity at a discount.
So that’s one of the things you’d have to resist.
Problem #9: Taken for Granted
David: Then the last element that’s kind of a con for me—and this is the one that I think a lot of folks would challenge—is this notion that the longer the client relationship, the better. I simply do not believe that.
Colleen: Oh, you don’t?
David: No, I don’t.
I think it’s in your firm’s best interest to have shorter client relationships and to assume right out of the gate and maybe even make a guess as to how long this client relationship with last.
You wouldn’t tell the client this necessarily, although you could. But you would say to yourself anyway, you know what, I think from everything I know right now, this probably will be an 18-month relationship, or this one may be a four-year relationship. That’s what I’m going to count on.
David: Otherwise, you take each other for granted.
The longer you stay around in a relationship, the less they will view you as an expert.
In developed cultures, that’s just a fact of life.
Colleen: Yeah. And sometimes they think they own you.
David: Yeah, for sure. Especially if it’s a monthly recurring relationship. Yeah.
So you want to be… When I write about this, I talk a lot about the distinction between a liberating force and an occupying force. If you’re a liberating force, you release this country from its captors, and everybody is cheering in the streets and they’re so grateful for everything that you’ve done.
But then the longer you stay there as the occupying force, now you start to date their daughters and you start to eat their food and live in their homes. It’s like, all right, these people need to move on.
The idea is that you are almost always a liberating force, and it’s healthy to cycle those relationships and not look for long client relationships.
I think the same thing is true of employee relationships as well. I think it’s not good for the firm to have long-term employee relationships.
David: Yeah. It’s just one of those assumptions we make, and it’s just not a good assumption. But in this context, I think having these MRR relationships tends to make them hang around longer than is healthy for you or them. It’s better to refresh these things.
Colleen: What about going back? If you work with a client, let’s say, you worked with a client for 18 months, what about going back to them maybe a year later to work with them again?
David: Yeah, that’s much better. Meanwhile, they’ve missed you over this year, and they’ve recognized how much effort and how much impact you’ve had, and they welcome you back. They also think, geez, this agency, whatever they were doing over this year they were gone, they got a lot smarter and now they also have a fresh perspective coming back in here.
The other thing that happens psychologically is they say they’re not afraid to tell us the truth. They’re not afraid to be objective and fiercely authentic with us because they know that the relationship isn’t going to last forever.
We want those kinds of people. We want people who are going to have a fresh perspective and tell us exactly what we need to hear.
Alternatives to Monthly Recurring Revenue
Colleen: Okay, so what do you suggest then in place of monthly recurring revenue? Like what kind of an approach?
#1: Start With a Diagnostic Approach
David: Whatever you do, it should look more like that liberating force, which means that you probably… What usually makes the most sense is you start with some sort of a diagnostic or an audit or a game plan measurement tool or something, whatever you call it.
Colleen: Yes. I love this idea. I’ve been doing this too.
David: Yeah, right, and it should be ideally packaged, so that it looks pretty similar from one client to the next: There’s a defined scope, there’s a defined price, there’s a defined deliverable.
This allows you… It’s what people used to do in their proposals. They would write these long proposals and say, “Here’s what I think. Here’s what I see. Here’s what I think we could do for you. Here’re some ideas about where this ought to go. Now, if you agree with us, then hire us to do all this implementation work. But here, Mr. Client, are all my best ideas about what you should do.”
That’s crazy. It’s giving away your best thinking—
David: …before they ever hire you. Instead you package that into a diagnostic and audit, which is really paid prospecting on your part. You’re getting paid for your thinking and then if they want to hire you to do this, fine.
Increasingly, they have a department that is capable of doing a lot of this work. They just want a perspective on what they should be doing. So it’s a way for you to keep getting paid without having to necessarily do all of the implementation work, since they have that capability themselves. That’s one idea.
Colleen: Right. I just did this in the form of a publication audit. I have a client that came to me and said that sales were stagnant with this publication, and they wanted it to look more modern. They were like, “Well, while you’re laying this out, if there’re any suggestions that you have to make this better and to help with sales, then you can just do that.”
I’m like, “Oh no. This will be a paid engagement.”
Colleen: “Here’s what we’re gonna do. We’re gonna do a consult. We’re gonna review this publication and we’re gonna keep in mind all of your goals and then we’re going to come up with a report of our suggestions and then we’ll discuss those with you and go from there.”
Colleen: And that’s before actually doing any work.
David: Yeah, absolutely. That’s the way it should happen. Right? And that’s episodic.
Now you could combine what you just described into a monthly recurring revenue relationship, and that’s a pretty good thing to do. But you do have to account for the fact that usually you’re spending more time in those first—that first or second month—getting up to speed and doing this diagnostic.
The client is kind of in a place where they owe you money because you’ve got to spread the costs of that diagnostic over several months. You’ve done a lot more extra work during the beginning of that relationship.
So it’s good to do that diagnostic at the beginning of a recurring revenue relationship. But those first few months probably need to be priced a little bit higher because of the extra work.
#2: Don’t Leave It Open-Ended
David: Another alternative would be to just don’t leave it open ended, so that you never really know when it’s going to end. In that situation, every time the relationship ends, it ends on a bad note. I mean, why else would it end?
So it’s like, okay, you’re going to use us… If we’re going to have a candid conversation, this is gonna sound like this: “You’re going to use us until you’re tired of us.” Well, what kind of relationship is that?
It’s not a good plan. We just moved, and I had a security contract at our former home with ADT, and I hated those people. The cost was high. They were just inflexible. I’d been hearing these ads on FM radio here in town about this company and it was $15 a month instead of $38, and there was no contract. You could stop it at any point. I’m thinking, “That’s what I want.”
It wasn’t so much about the lower cost. It was that I wasn’t locked into anything. At any point, if I didn’t like them, I could just quit using them.
That’s kind of what we’re talking about here. Although you could even be more aggressive than that. You could say, “All right, it does make sense for us to expend a certain amount of energy every month because there are some specific things we need to fix on your behalf. We think that’ll take us about 14 months. Now, we can always revise this if we find that at that point you need more help or if you end up needing less help, but let’s assume this is going to last for 14 months. Then let’s re-evaluate the relationship.”
That’s a much better… It doesn’t sound that you’re getting greedy in wanting some sort of a—I don’t know—a fixed relationship that is hard to get out of.
It’s like it creates too much friction in the relationship, so that’s what I’m aiming for.
Colleen: Well, it kind of sounds like you’re taking back some of the power that normally you just relinquish to the client.
Colleen:,“Hey, I might not want to work with you anymore after this.” You know what I’m saying?
David: Yeah, exactly right.
#3: Offer an Alternative
David: Another idea would be to offer them an alternative. So say, “Listen, I think we probably need to work together for two years. I’m not sure yet, but probably about two years now. That’ll be three phases. There’ll be this diagnostic and then we’ll do the work and that’s the second phase. In the third phase we kind of make adjustments along the way.
“If you’re willing to stick with us through these three phases, we’re going to be in a position to make part of our compensation variable, so that 80% of it can be or 90% of it will be in a traditional sort of arrangement.
“But the other 10 or 20% will be based on actual results. Now we can’t do that unless you’re willing to let us manage the second and the third phases as well. But if you’re willing to do that, and then, if during their relationship you want to go in another direction, then we’ll have to reflect that and how we get paid.”
You can give them the pros and cons and give them an option and just say one incentive for working with us longer is not just predictability, but that we can offer some sort of a guarantee because we’ll have more control.
Even if they don’t choose it, it sounds better to them, and they like having options as well.
David: So that’s it. Those are really the alternatives. Or, if you decide that you don’t even need alternatives, you just really want to do the monthly recurring revenue, at least be aware of some of the cons and think about how to pay more careful attention to when the relationship is going bad.
Maybe think about how to keep it fresh, so that it doesn’t go stale. There’s just lots of downside to the monthly recurring revenue. It seems like the holy grail.
The whole HubSpot movement has really encouraged this as well. I think it’s a huge mistake really. You can see some movement in that direction as well. They’re saying, “Ah, maybe this doesn’t solve everything.”
Colleen: Right. Well, and you put yourself in more of an expert position, I think, when you reach out to the client, kind of anticipate and suggest additional needs, as opposed to, “Oh, now they have a problem and they’re coming to us and we’re just going to do this every month.”
You’re in a more of a reactive, than a proactive, situation.
David: Right. Because experts help clients even when it means they’re not going to make the money. They make the best recommendation that’s in the client’s best interest, even if that means they get that help from somewhere else.
When you’re in a monthly recurring revenue relationship, you’re essentially saying, “We are automatically your best solution, and it’s just simply not the truth in some cases.”
So it’s just being a little bit more mature in our relationship with clients and acting more like experts.
Colleen: So the main takeaways are avoiding this expert-versus-order taker mentality, and then not doing hourly work.
David: Yeah. Now if people did hourly work and they got paid for all the time they’re spending with clients, then, in some cases, they’d be making a lot more money because they’re leaving so much money on the table.
But there is a really firm hard ceiling to doing hourly work, and experts don’t do hourly work. They just don’t.
If you’re going to have a monthly recurring revenue relationship, there is no way to do that without structuring it on an hourly basis. There’s just a certain ceiling you’re going to hit if you’re going to insist on having client relationships like that.
Colleen: Where can listeners get more of your insights?
David: If people want to learn more about this… I’ve tried to write quite a bit about this. If they want to go to davidcbaker.com. There’s a pretty powerful search function.
Almost everything on there is free. There are a couple of webinars. I do seminars.
My fifth book describes this a bit. It’s called The Business of Expertise, and they can learn about that at expertise.is or go to Amazon.
Colleen: Okay, great.
David: It’s been fun to talk about this stuff. Thank you.
Colleen: This was awesome. ¡Muchísimas gracias!
David: De nada.