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Recurring Revenue: The Two-Word Business Plan Every VAR Needs

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I'm a big believer in recurring revenues; I believe it's one of the few ways for VARs to grow a business someone may want to pay cash for rather than expect the sellers to spend five years as  indentured servants transitioning a customer base because a buyer is unwilling to pay much cash up front due to an uncertain revenue stream.

The problem for most VARs looking to sell their practices is they often don’t have a strong base of recurring revenues (for the sake of argument let’s assume that margin paid by software publishers is unreliable and subject to change and therefore heavily discounted by a buyer).

Instead these deals usually include some cash plus an often lengthy employment agreement meant to smoothly transition customers.

Recently I was glad to see Sage  North America’s Channel News Supplement - an email newsletter sent monthly to all Sage Business Partners -  prominently feature the following advice under the heading  Actions To Transform Your Business. It posted the following advice:

Actions to transform your business starting today!

1. Analyze your business model and ensure it aligns to today's "deal economics."

2. Develop a set of pre-packaged and recurring revenue service offerings for your customers.

3. Decide if your organizational structure (integrated or separate) is optimized for the future.

4. Increase your marketing efforts and focus on new customer campaigns and lead generation.

5. Align your sales strategies and plan (skills, structure, activities, measurement, and compensation) to the realities of the recurring revenue sales model.

This is the first time I’ve noticed this software publisher specifically recommend VARs develop their own recurring revenue streams. Sales of new prepackaged solutions are all but dying so the advice for VARs to dig deep to develop “recurring service offerings” is solid.  The new reality is most VARs are relying on margins paid for maintenance renewals, upgrade fees and periodic project work for the bulk of their revenues. These services are all generating revenue - though how much of it is recurring versus on-demand?

Ask ten VARs whether they require customers to be enrolled in an annual recurring support or access agreement directly with the VAR and you’re likely to hear 10 VARs shuffle their feet proclaiming “we’re working on it but we are not there yet,” followed by “we have a lot of customers who just want to pay us hourly when they need us.”

To paraphrase Lester Burnham in the 1999 hit movie American Beauty - those VARs are dead - of course they don't know that yet.

Think about which model is more attractive to you as a buyer:

VAR A -- Has 500 customers who are hourly "pay as you go" because "that's the way they like it" and only pay whenever there's a problem and whenever they feel like calling.

VAR B -- Has 250 customers who pay a VAR money per year, every year for ongoing support, upgrades, access to resources - plus more for projects. The VAR does not have any fallback “pay as you go” offering - all the customers are enrolled in a recurring annual plan.

In the majority of situations a predictable and reliable stream of recurring revenue is more highly valued than an unpredictable revenue flow.

So how do you get from unpredictable to recurring? Here are some suggestions:

  • Never go to a meeting with a prospective customer without a clear answer to the question “do you provide hourly support so I can only pay when I call”. Your answer should be no. Don’t be pressured into making an exception - because every customer thinks they are an exception.
  • Don’t accept any new customers without requiring them to be on your own support agreement. Yes, this means you have to be willing to walk away (which you’ll have to do from time to time).
  • Structure your support agreements in three different levels - for the sake of simplicity term the levels small, medium large. The base fee for small is your entry level support only agreement, medium includes additional services such as an annual upgrade and large includes everything plus on-site consulting. You can specify certain work as extra and not included in the agreement.

Gradually introduce your support agreements to existing customers as you quote them on future support and upgrades. One option I offered existing customers who resisted going onto a support plan was a much higher diagnosis fee (flat amount) to eliminate the requests for hourly. Customers are smart and can do math and they will if you leave the door open to hourly per call support.

What you’ll find is key to converting customers from “pay as you go” to recurring - is the removal of the pay as you go option. In fact, set a date and as of that date your firm no longer offers per-call hourly support, period.

If there any rule in the consulting world that indicates you must offer pay-as-you go in hourly increments I’ve yet to find it.

So what results should you expect?

  • Customers who are price shoppers and never call will go find another VAR to never call.
  • Customers who are your A and B level will stay. Many will gladly purchase a higher level of service at a fixed annual price (for example upgrades) just to know that they no longer have to worry about managing the upgrade process each year.
  • Your D and F customers may hang around and call with “quick questions.” The key is to cut them off before they can get the answer from you.

I’ve found it helpful to develop a set of diagnosis fees to offer my existing customers who initially did not want to go onto a support plan. This set of much higher fees (which are all keyed on how quickly the customer wants a call back for their diagnosis.

For customers who dropped support or decided they didn’t want it, but they continue to call for support we offer four different prices for our diagnostic sessions. The pricing depends upon the urgency with which you request us to respond:

A. No sooner than 24 business hours from receipt of payment

B. Within 4 business hours from receipt of payment

C. Within 1 business hour from receipt of payment

D. After business hours – within 4 hours from receipt of payment (as available – please confirm prior to paying)

**Note: Business Hours = M-F 8am to 5pm EST (Excludes Holidays)

Notice two things about the options a customer has that refused to go onto a support or access agreement has. First, they must pay by credit card in advance, if they want a call within an hour the fee is $950 and the response time starts at the time they actually, not promise to pay.

The session is also strictly diagnostic. I don’t make any claims that I will fix the issue. They understand they are being given a diagnosis only - and that diagnosis may include a quote for fixing the issue if it’s something we can’t quickly fix while making our diagnosis.

Over time the customers who call with questions will figure out that your options for an annual support agreement are probably a better deal when compared against your fees for diagnosing.

There are many opportunities for VARs to increase their recurring revenue - and as a result the value of their practice. Take some time to think through your strategy - and before sitting with any new or existing customer to talk about their support options - be sure to have a plan - and stick to it.

Wayne Schulz is the founder of Schulz Consulting. He began his career working for two professional service organizations and managing their consulting divisions. He has been active not only with the implementation of Sage 100 ERP software(formerly  MAS 90 and MAS 200),  but often is engaged to help clients design or evaluate their current accounting procedures.

 

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