If you ask a freelancer or agency what they wish for the most, they’ll usually say “more leads and clients and recurring income.” Retainers are a popular way to get monthly recurring revenue (MRR). But retainers are not without issues and they should definitely not be considered “passive income.”
Retainers in a Nutshell
In the most basic of terms, a retainer is an agreement between an agency or freelancer and their client, to perform a service on a regular basis for an agreed price. Another version of this is a retainer that stipulates terms of access and availability. Retainers are usually paid monthly and in advance.
In other words, a retainer is type of subscription. It’s not too different from how your favorite boating magazine shows up in your mailbox once per month for an annual price of $49.99. You pay in advance with the benefit of being protected from price raises and the publisher can pocket the money immediately.
Why Retainers Are Advantageous to Both Buyers and Sellers
A retainer arrangement is beneficial to both client and consultant for many reasons.
Advantages for the Client
- The benefit of knowing the price in advance which simplifies planning and budgeting.
- The comfort of knowing that they’ll have access to the consultant when they need him or her.
- Knowing that the consultant or agency will take a lead in ensuring the client gets what they need and when they need it.
Advantages for the Consultant, Freelancer or Agency
- Being paid on a regular basis and in advance, which helps improve cash flow.
- Ability plan the upcoming work and set time aside in the calendar.
- Having the ability to foresee their work and earnings which helps when making financial planning, preparations for major investments or making hiring decisions.
- The idea that retainer client work presents some kind of tradeable asset (contracted work) which can be sold as part of the firm (a debatable idea since retainers usually depend on key individuals).
- The sense of being elevated to being a partner with the client and working on long-term engagements rather than short one-off stints.
The Problems With Retainers
Retainers might seem simply fantastic at first glance. Imagine being a freelancer and getting paid every month and not having to worry about winning work or finding new clients. Or being a client and knowing your favorite agency will always have time for you. It sounds like the best win-win situation ever. It certainly can be.
But recurring revenue contracts bring their own set of issues. These problems are not inherent to retainers themselves. Instead, they’re often the result of retainers done wrong.
Retainers Encourage Easily Quantified Commodity Work
A way many digital marketing agencies, especially those working with inbound marketing or content marketing, have set up their recurring revenue arrangements is to do repeat work. This makes sense since consistency is necessary in digital marketing. Marketing habits create buyer behavior, whether it’s about posting to a blog or sharing pictures in social media.
Some of these agencies rely on the (not so) good old hour for billing even for recurring work. Others have made more creative arrangements to deliver a set number of something on a regular basis – such as three blog posts per month. But even if the work is high quality and the advice that comes with it is highly strategic, the repeat delivery risks devaluing it in the eyes of buyers.
MRR Work Can Be Hard to Combine With Value-Based Pricing (Though Not Impossible)
Most agencies set up retainers to involve a set number of hours of service per month as part of the agreement. This is nothing but classic cost-plus pricing. While projects can be value-priced as fixed prices in tiers, retainers work differently.
One attempt to get around this is point-pricing. Agency advisor David C. Baker argues that even point-pricing doesn’t get around this problem since it’s just a “sleight of hand.” I’m not fully convinced since point-pricing captures some of the value since you price the client. Suffice to say that it’s hard to price by value using retainers.
Retainers Can Lead to Reduced Quality Which Puts the Entire Client Relationship at Risk
Recurring work tends to get boring, even if it’s your best friend for financial predictability. Working with the client becomes a matter of using up the allotted time or resources you’ve promised, not always being at your very best. As a result, quality risks dropping which puts the entire client relationship in jeopardy. The risk of this happening is even greater if you start viewing your retainers as “passive income.”
Working Successfully With MRR Work Requires A Person With Account Management Skills
To work effectively with retainers, you need to manage the client relationship. This means that someone needs to take lead and keep the client communication flowing. The account manager needs to be a people person, someone who can enthuse others as well. They need to feel for the client and their challenges and transfer that passion for the work to everyone else working on the retainer. Not all agencies have the right people to pull this off.
Retainers Can Mask Client Dissatisfaction and Lead You Into a Sense of Safety
Just like how a retainer can lull you into complacent mediocrity, it can also hide client dissatisfaction. That’s an ugly truth that will rear its head suddenly and with no warning.
If you rely on just a few clients, losing a retainer could have dramatic consequences and even bankruptcy. An effective account manager will provide a vantage point and a chance to see what’s over the next hill as far as client relationships go.
Too Often, MRR Work Is the Digital Equivalent of Predictable Assembly Line Production
Some historians say that Henry Ford’s greatest contribution to industry was the assembly line. An assembly line runs well when everything is consistent. It’s the same with retainers. If much of your income comes from retainers, you’ll soon look for ways to standardize your processes to make the machine run even smoother.
But that comes with a price. As your business’s performance predictability goes up, its ability to innovate will fall. We delight our clients with ideas and solutions we come up with during meetings characterized by creativity and even controversy. If you’ve spent enough time working with clients, you will have been in at least one meeting where everything just clicked. Everyone left energized and the project that followed was something you still remember and cherish.
Those meetings happen because we let things happen at random. They will probably not take place within the homogeneous. confines of a poorly structured retainer agreement.
How to Do Retainers Right
There are clearly lots of issues with retainers as a way to create recurring income. They’re not the silver bullet that many hope for and definitely not an easy way to create recurring income. But that doesn’t mean they’re all bad. Retainers can work extremely well under some circumstances. Let’s look at some ways retainer agreements can serve rather than hurt you.
Limit the Engagement and Set Specific Goals
Having a client for life could be a grand thing. Like your grandparents’ happy marriage that lasted six glowing decades and until they both passed away within days of one another. The idea of long relationships stir feelings of romance and loyalty.
But in the world of professional services, that doesn’t necessarily involve a retainer. If you can effectively serve a client for decades, go for it. But that’s very rare. People change jobs and companies are merged, absorbed and restructured. The people chemistry that gave rise to one successful collaboration rarely last more than years, at the very most.
Retainers are seldom effective for that long. For that reason, I recommend setting a time limit to your retainers and specify measurable goals. Retainers are needed since some work requires time to show results. But that time is never “forever” but usually in the span of months to years. A clear goal and a time span will keep everyone’s eyes on the finishing line and help you stay focused.
Offer Degrees of Value By Being Creative When It Comes to MRR Terms
Combining value-based pricing and retainers can be a challenge. But I hold the view that it’s more of an issue of lack of creativity in writing terms than an absolute fact of reality. Some of the ways you can affect the value a retainer provides is:
- Specify the means by which a client can contact you.
- Define the hours during which a client can contact you.
- Write out the promised response time on communication from the client.
- Offer access to information, content or materials that aren’t publicly available.
- Emphasize access to information, content or materials that are publicly available but which the client may not be aware of.
- Offer training of the client and their team.
- Offer access to weekly expert summaries of relevant information – like a panel discussion, written or as video.
- Regular workshops to review progress and kickstart new initiatives.
Retainers can also easily be sold in tiers, allowing you to take advantage of what in pricing is referred to as “bundling.”
Create Retainers to Ensure Client Success
In software-as-a-service companies, there are whole departments dedicated to “customer success.” The reason is simple, these companies know that if someone buys a CRM software subscription and doesn’t see results, they won’t keep paying that monthly bill. To avoid that, they have specialists on payroll who help their customers succeed with their products.
A retainer can be a great way for you to do the same for your clients. In other words, a retainer is a platform for you to provide the services needed to help your clients get the most out of what you’ve delivered.
A blog that was built for marketing won’t generate results without someone post and people reading it. A website will be useless if people can’t find it – ergo it requires search engine optimization (SEO). These kinds of services that are performed after the deliverables are often valued higher than the website or blog itself. In the chart above, the horizontal axis is time and the vertical is perceived client value. The work done as part of a customer success retainer is represented by “ongoing support”.
Use MRR Contracts As a Way to Grow Websites and Deliverables in Installments
Last year I interviewed agency owner Spencer Brooks who has been using retainers for years. Unlike the marketing agencies that use retainers to sell deliverables in an assembly line fashion, Brooks’s digital agency uses them to build complex websites in pieces. They consider it a way to manage risk and to ensure the money is used to create the the greatest impact possible for the client over time.
Create a Separate Brand for MRR Work and Digital Production
If the idea of repeat business with recurring deliverables appeals to you, consider creating a separate brand for it. I bounced this idea with some agency owners and advisors a while back. According to them, the biggest challenge with this arrangement is brand dilution – you’ll be spreading your resources too thin. But the upsides are major. With a separate brand, you can let your current brand stand for one-off strategic and high value services. Meanwhile your “factory” brand can take care of the outsourced digital production that isn’t glamours but brings regular ka-chings.
Don’t Hesitate to Use Retainers for Strategic Advising
While there are certainly issues with providing deliverables through retainer contracts, strategic advising is a different matter. If you’re a management consultant, retainers can be a boon. The important thing is not to tie them to hours.
A retainer can involve being available for consultation on short notice during office hours. More value can be created by increasing your availability and allowing the client to contact you by text message or even call during weekends.
This kind of retainer requires that you have a solid standing with the client and absolute trust. You need to be among the very few who “help clients think” and who provide value simply by offering perspective or coaching.
Don’t Think About the Hours, But Don’t Forget Them Either
Don’t consider a retainer a way to ensure you have your time sheet filled or as a kind of “easy money.” Instead, consider a retainer a unique opportunity to work with a client over time to create changes that require consistency and focus.
Do what you can to take hours off the table and instead focus on results. In many cases, hours can be avoided and handled using a “fair use” clause in the contract. This allows you to renegotiate the retainer should it take too much of your time.
An MRR Arrangement Is Only As Successful as the Client Relationship It Relies On
In the end, a retainer is no use unless the client is happy satisfied and trusts you. A retainer doesn’t mean you can stop serving the client. When a client is on retainer, it means you need to redouble your efforts to manage that relationship. That involves staying in touch and understand the client’s expectations and needs to be able to respond and provide consistent value.
The retainer is a formalization of the trust the client has given you. In the end, without a successful relationship there is no retainer, regardless of what the contract says.
Conclusion: Retainers Are Not “Easy Money” and Definitely Not “Passive Income”
I hope I’ve managed to give a more nuanced idea of the advantages and drawbacks of retainers for recurring revenue. Personally, I’ve gone from being a fan of retainers to being more hesitant to recommend them as I’ve seen how some agencies rely on them for all the wrong reasons.
In my view, a retainer should be an expression of a strong client relationship and a sign of mutual trust. It’s not primarily a form of steady recurring and passive income but a way to provide value over time. Done right, it will pay you while you sleep. But you should never think of a retainer as a form of income without effort or you risk losing the retainer and the client too.
Are You Using MRR Contracts? If So, What Are Your Experiences?
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