When it comes to RMR, we aren’t where we need to be. Our recent Financial Analysis of the Industry report reveals that the percentage of revenue from recurring sales has been dropping since 2010, reaching a historical low point of 10.83%.
The report also indicates, however, that most profitable and top-quartile companies consistently rely on recurring sales. For example, the Top 10 companies derive an average of 19.82% of total revenue from recurring sales, and post a pre-tax profit of 14.32%. The percentage of revenue from recurring sales drops to 9.44% among the non-Top 10 companies; their pre-tax profit is only 2.3%.
So, even though we aren’t where we need to be now – it’s important that we get there. It’s the secret to our survival.
It’s not necessarily hard to understand why we’re slow to adapt RMR. Old habits are hard to change – whether it’s a morning cup of coffee, Saturday lawn-work routines, or our desire to sell large, capex-based integration projects. These projects requiring lots of upfront capital have been the bedrock of our industry forever. We’ve built organizations that are really good at implementing these solutions.
Eroding hardware margins, coupled with new software-based solutions and other rapidly proliferating technology trends, however, have made it more difficult than it used to be to grow our businesses this way. Even when we do hit revenue targets, we often see diminishing returns on profits.
I think the movement toward recurring revenue has been met with resistance because we’re asking people to change their routines. We’re asking them to do what’s uncomfortable, and to embrace change that they may not be ready for.
What if there was another way of thinking about service and recurring-revenue offerings? What if, instead of looking at RMR as a “new thing,” we viewed it as a small adaptation from the way we typically sell? What if we stopped thinking about it as a new business model and just did everything we do now – but as a service?
Of course, “everything” isn’t always feasible. We can’t sell a recurring installation for a one-time install, for example, but the solutions, maintenance, design/consulting, and monitoring can be performed as a service. If you’re selling room-based video on a one-off basis, it may be fruitful to consider how to combine subscription services, leasing, and recurring service contracts to offset the large, one-time fees that traditionally overwhelm customer budgets.
This would mean more dollars for services like bandwidth, licensing, monitoring, and maintenance. But with computers, PTZ cameras, and large-format displays, there aren’t massive amounts of hardware anymore. Redesigning the offering and selling these rooms as a subscription is a feasible way to lower entry barriers and convince customers to move forward with more rooms with a shorter sales cycle.
Let’s not forget about how we’ve historically sold maintenance and service contracts: Mostly as a one-time fee, where the customer picks a period of time and purchases it at the time of the larger sale. What if, instead, the service was included in the recurring subscription price? Like the room above: If I had my way, it would include a service-level agreement (SLA) that would come with the system on a monthly basis. As a growth engine, there could be improved SLAs or remote monitoring services that could be added for a certain uplift. Once again, those would be paid as a monthly subscription that would last as long as the customer uses the solution.
So how do you handle the equipment? If there is hardware involved, and you’re selling services and maintenance subscription, who owns the equipment if the customer cancels? There isn’t a universal answer. Some companies could cycle the hardware into their next deployment if they’re creating consistent packages. With the hardware being a smaller percentage of the bill, this could be entirely achievable.
On the other hand, hardware is a depreciating asset. So, at some point, you need to cut your losses. If the equipment is being paid for over one to two years, then taking it back and using it again could be reasonable. You can also have a clause in your service agreement indicating that the customer will pay if they want to keep the equipment after a service separation (it could be price plus markup). Either way, this could solve some of those problems.
Systems aren’t one size fits all, so this type of thinking may not work for every custom solution. But many meeting rooms, training rooms, and huddle rooms are done similarly. Custom is good if there is a huge premium, but if that premium on hardware and labor doesn’t exist, then streamlining gives a greater margin opportunity and makes it possible to take something you’re selling every day on a custom basis and turn it into recurring revenue. And that is the most important thing.
It’s time to reconsider how we think about recurring revenue. Really, the work we’re doing is very much the same: hardware, installation, and service. But we can sell it differently, turning our businesses into service- and recurring revenue-based businesses that meet the changing needs of customers and provide monthly recurring revenue. We’ve got resources that can help if you’re interested in pursuing RMR and benefitting from monthly payments. NSCA Business Accelerator GreatAmerica can help you increase margins, cut down on price wars, and improve cash flow. –Chuck Wilson, NSCA Executive Director