Solving the Recurring-Revenue Conundrum
Vendors looking to build a business model based on recurring revenue walk a fine line: Cultivate performers without disenfranchising the rest.
By Larry Walsh
The recurring-revenue model associated with services isn’t new. Vendors have known about it for years and, in many cases, encouraged partners to adopt it as a means of stabilizing their businesses and driving product sales. Now, more and more vendors are looking to create their own recurring-revenue streams through partners to make their earnings more consistent and drive up valuations.
Ah, but there’s a catch. Not all recurring revenue is good.
The technology industry is still a long way from becoming fully immersed in the services model, but some are already saying we’re in the “services age.” Unlike hardware and software sales, services sales entangle sellers with buyers, creating persistent and predictable revenue streams. This means sellers – vendors or resellers – have a stronger probability of knowing what revenue will come and when .
Vendors have preached the benefits of the recurring revenue model since the mid-2000s, when VARs started turning into MSPs by delivering managed services. Only in the past few years have vendors – thanks to the cloud evolution – started looking at the recurring-revenue model in earnest, since it does have the benefit of predictability and turns accounts into strategic assets that bolster valuations.
Recurring revenue is a good thing if you can get it, but vendors face several serious challenges in building recurring-revenue streams. The largest is the partners themselves.
Partners – be they VARs, MSPs, systems integrators, or agents – appreciate recurring revenue as much as vendors, but they don’t always follow the leading tenet of the model: Always be selling.
Whether a vendor or partner, the success of recurring revenue is dependent on the continual addition of new services and the maintenance of a low customer attrition rate. If those two factors are handled well, recurring revenue will almost always outstrip expenses and deliver healthy profits.
Of course, it’s easier said than done, particularly for partners.
With few exceptions, partners aren’t good at selling. Most have built businesses on their technical skills – the ability to deliver and support the technology products produced by vendors. Subsequently, the majority of solution providers are exceedingly reliant upon vendor direction, support, and funding for fundamental marketing and sales activity.
Now, vendors looking to bolster their profitability and valuation may want to go back and examine their revenue history. They’ll likely find that the 80/20 rule has been broken and they’re highly dependent on a scant few partners for the bulk of their revenue. In many vendor channels, the vast majority of partners are sitting on a few accounts that are providing their recurring revenue but contributing precious little to the supporting vendor.
If partners aren’t increasing consumption – expanding sales or consumption of services by existing accounts – vendors compensate by adding new partners to the mix. With new partners come “new to you” sales. This means partners will come into a channel program with at least one sale in their pocket. Add enough new partners and those sales add up to a lot of revenue. The challenge is getting those one-sale partners to transact a second or third sale.
Here’s the problem facing vendors that follow a recruitment-as-growth compensation strategy: They eventually reach a point where there are fewer partners signing up and the new partners create conflicts with legacy resellers. In other words, continual recruitment will ultimately slow sales and increase costs, resulting in a stall in recurring-revenue benefits.
Vendors building recurring-revenue models must moderate and manage their channel partners carefully and cultivate performers without disenfranchising opportunistic underperformers. At The 2112 Group, we address this challenge in four ways.
1. Partner Profiling and Performance Value Assessments: This provides greater understanding of the types of partners that are currently in, and entering, a channel program, and how to prioritize resource assignments to drive greater returns on channel investment.
2. Heat Mapping Channel Distribution: Through an analysis of channel coverage and performance comes the development of a focused plan for recruiting fewer partners with greater return on investment potential.
3. Bifurcating Enablement: This is all about developing two-tier programs in which high-value, committed partners get high-touch support and enablement, while lower-value partners are given the opportunity to succeed through automated systems.
4. Ecosystem Awareness: Gaining deep analytical insights into the composition of channel programs and their marketplaces enables better decision-making and program development based on near-real-time data.
The channel will always have a dichotomy of over-performing/performing and underperforming/non-performing partners. Striking the right balance in channel composition is key to ensuring a vendor’s recurring-revenue model produces desired, positive, and predictable returns.