What’s the best thing about SaaS companies? The recurring revenue, of course! It’s a sweet deal when you can onboard a customer once, and the revenue keeps rolling in.
However, not all SaaS revenue works that way. Non-recurring revenue presents another income stream that can be invaluable. Professional services are one particular type of revenue stream that can be difficult to understand and categorize.
Here, we’ll cover the main differences between recurring and non-recurring revenue, as well as how professional service fees fit into the picture.
❓What’s the difference between recurring and non-recurring revenue?
Very simply, this is revenue that you expect to recur. In other words, revenue is recurring when customers are charged regularly for ongoing services.
The most common type of recurring revenue is subscription fees, paid either monthly or annually. This revenue is typically contractual, but not always.
What about annual contracts that are paid upfront? On the surface, upfront contract payments may seem like one-time revenue. However, it’s typical for customers to renew their contracts - after all, your product should still be invaluable to your customers after their contract ends. This means that an up-front payment on an annual contract is still considered recurring revenue.
Take Salesforce, for example. Their customers pay a lump sum for their entire contract on an annual basis. Because of the continued need for their services, Salesforce anticipates that their customers will renew their contracts year after year. While there is no guarantee, there is still a reasonable expectation of contract renewal. Therefore, this type of revenue can still be categorized as recurring.
There are non-contractual types of recurring revenue as well. For example, take Stripe, a payment processing platform for online businesses. Most customers use this service periodically, but Stripe can still reasonably expect those customers to return.
In short, if you can reasonably expect the revenue to happen again on a regular basis, it’s recurring revenue.
Non-recurring revenue is any revenue that you don’t anticipate happening again. It is typically one-time and is not provided on an ongoing basis.
For example, imagine you're hosting a one-time virtual event for which you're selling tickets. Since the event is one-time and not monthly or annually, you have no reason to expect that the revenue will recur. These ticket sales constitute non-recurring revenue.
🧑🏽💼👨🏼💼👩🏿💼What are SaaS professional services?
Professional services are provided to customers to achieve a specific, defined goal. Usually, these services are provided for a fee. Is that fee considered recurring or non-recurring?
Usually, revenue from professional services is non-recurring. Customers typically buy one time, the services end when the project is over, and the revenue does not occur again.
Onboarding services are the most common type of professional service in SaaS. These are definitionally non-recurring since a customer only onboards once. Integration services and custom feature development are other examples of professional services.
🧐 Which is more important: professional services or recurring revenue?
While professional services sometimes are recurring revenue (more on that later!) they’re typically thought of separately from each other. The major question: which is more important to your business?
Of course, the SaaS model relies heavily on recurring revenue. What we’re discussing here, however, is revenue beyond your regular subscription fees. When it comes to expanding your revenue, where should you focus your attention?
Conventional knowledge states that recurring revenue is preferable over one-time revenue. If you can choose between getting revenue once and getting revenue multiple times, you should choose the latter!
That doesn’t mean that professional services can’t be a key part of your business model. What it does mean, however, is that you should focus more on continuous sources of revenue than on time-limited professional services.
The exception to this is when you can bundle your professional services into recurring revenue. In that case, enhancing your product with a variety of services is a smart move.
💰When are professional services recurring revenue?
If the need for professional services is truly one-time, keep it separate from your recurring revenue. You want to avoid this revenue impacting your gross margins in the long term.
In contrast, professional services are considered recurring when the fees for these services are bundled into a platform fee.
Platform fees, also known as service fees, are charges for the use of the platform. These are typically charged separately from the monthly or annual subscription fee.
Sometimes, professional services are required on an ongoing basis to deliver the intended product experience.
For example, the accounting firm AirCFO sells subscriptions for financial modeling (and by the way, we recommend them!). Their services demand the continued assistance of real financial analysts to serve their purpose. Their customers cannot meaningfully use the software without the help of these experts. In this scenario, it’s appropriate to charge recurring professional service fees.
Services that necessitate a very complicated, difficult-to-use product (for example, Palantir) require professional support services on an ongoing basis. That’s because your users will likely need regular assistance to use the product to its full potential. In that case, bundling professional services into your recurring subscription fees is a good idea.
🏁 Professional Services and Recurring Revenue: The Bottom Line
Professional services are difficult to categorize. Depending on your business structure, they may represent different types of revenue. If you can, convert your professional services revenue to a recurring format to take full advantage of the SaaS business model.
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