Why Monthly Recurring Revenue (MRR) Arrangements May Not Be Ideal

Though I’ve been dropping passive-aggressive hints trying to undermine this movement to MRR for twelve years, I’ve never written a logical insight piece on why. To clarify, MRR is the in vogue abbreviation for “monthly recurring revenue” and it’s what modern firms view as the holy grail of great client relationships: that check that shows up like clockwork every month from your better clients.

The allure is obvious, of course:

1. Our revenue stream is more predictable, making forecasting easier (true).
2. These established contracts will make it easier to sell our firm some day (not true).
3. It elevates our relationship to more of a partner-status where we don’t have to keep proving ourselves, but instead just get to work. It demonstrates how serious the client is in working with us (maybe).

I’ve been a lonely voice beating this drum, though, that MRR is a bad idea except in rare circumstances (detailed below). I remember headlining an event in Boston where an agency advisor came up to explain why I was so off base, only to see him say essentially the same thing six years later. I actually started this article seven years ago but figured not enough of you would read it to bother. But I think now is the time.

MRR is a variant of the retainer relationship. Retainers started with the PR segment in the 30s. Then they migrated to larger ad agencies as a way to formalize their contractual rights in entering into contracts on behalf of their clients.

The segments of our industry most addicted to MRR are these:

• PR (public relations)
• PA (public affairs)
• SEO (search engine optimization)
• SEM (paid ads on search platforms)
• Inbound marketing (producing content to move prospects from MQL to SQL status)
• GDD (growth driven design where the web presence you are managing for a client is in a constant state of improvement)

Let me explain why I’m not a fan and then suggest a few alternatives. For now, though, don’t make any big changes. Just let your mind absorb the notion that MRR is not the holy grail. If you get comfortable with that idea, you can then move on to the alternatives.

I think MRR is problematic because:

• MRR screams implementation and not strategic guidance. Even if you’re delivering high-level strategy to your clients, it doesn’t look that way when it’s wrapped in a steady, evenly delivered package.
• MRR promotes over servicing, especially from unsophisticated clients. Writing a big check every month is a high hurdle to them, and they manage the pain by feeling like they own you.
• MRR doesn’t always lead to your best work. Your people can slowly migrate to the notion of filling time to use that month’s allotment up.
• MRR is not an easy bedfellow with value pricing because the scope is almost always defined by hours and not results. And “point pricing” is really just a sleight of hand to mask this, by the way.
• MRR requires more disclosure to your client than I think is healthy. They’ll stick their nose into who’s working on things, the realized cost of that person, and so on. There is an overhead factor in the reporting requirements as well.
• MRR relationships, when they start to go bad, veer off course so suddenly that you can seldom save them. Clients have higher expectations and a quiet resentment with this entitlement arrangement, and it sometimes breeds mistrust.
• MRR decreases the pressure on innovation. As soon as the client is sold on the arrangement, you spin up the big flywheel to eat away at the hours every month. All of you ethical readers honestly do try to move the needle as much as possible for your clients, but the big machine you just programmed chunks out the same widgets, month after month, and you aren’t really reinventing yourself. Where’s the pressure to do that?
• MRR clients may expect a discount in exchange for this fixed arrangement, and whatever discount you give will come straight from profit.
• MRR is built on an assumption that there’s a direct correlation between the length of a client relationship and the quality of that relationship, when in fact there might be an inverse relationship.

You’ve seen some or all of these problems, right? But if you’ve configured your client relationships this way, it’s going to be a real stretch to think differently. You may not be ready for that, but let me just plant some seeds about the alternatives you might consider:

• Do a paid audit/diagnostic at the outset of the relationship and then create a set of recommendations. Describe the target (the KPIs you want to meet on their behalf) and then give them a fixed price with an open-ended timeframe. You could establish some intermediate milestones to mark off your progress in big chunks and then tie payment boundaries to that. Say your client needs more B2B leads from their website. Your audit/diagnostic determines what’s possible and how to get there. If they decide to hire you to make that happen, the terms lay out when you get paid, and those are tied to big wins and not when the calendar flips over to the next month. That’s what the illustration is meant to convey: get money or permission when the client is most satisfied.
• Don’t leave a MRR relationship open-ended. Instead, tell them at the outset that you think this needs to last for 7…or 10 months. Or whatever. It’s not an entitlement but an honest prediction of what they’ll need. At the end of that term, you can renew or transfer the work to them. It’s sort of like the pre-emptive breakup from that Seinfeld episode.
• Tie a guarantee to how long they stay with you. The longer the relationship, they more you’ll control, and the stronger results you can predict. This flips the arrangement and gives them an incentive to stay with you longer, and they are aware of that at the outset of the relationship.
• Install a three-step relationship from strategy to implementation to staff augmentation. That’s a big topic I’ll cover later.

A retainer or MRR relationship does make sense in some cases, so don’t assume it’s always bad. But those cases usually mean that the MRR portion of the relationship just covers account service or project management or strategy, with bursts of activity looking more episodic, winding up and down as necessary.

With a strategy retainer, for instance, you now have a convenient place to throw your thinking without worrying about compensation. You have an incentive to put your feet up and think on behalf of your client without wondering how you’ll get paid.

If I’ve confused you with all this, just concentrate on this one point: retainers and MRR relationships scream hourly work, and you shouldn’t be doing hourly work.