Page 31 - Security Today, April 2022

Table 1. Contribution to Margins
This illustrated that any amount of recurring revenue sales will produce 150% more margin than the same amount of one-time revenue sales.
$300,000 DIFFERENCE
Types of Revenue
Amount
Margin %
Margin
One-Time Recurring Revenue
$1,000,000
20%
$200,000
Recurring Revenue
$1,000,000
60%
$500,000
Table 2. Contribution to Business Valuation
This illustrates that if you decide to sell your company, recurring revenue can contribute approximately 5.7 times more to the sale price you will receive than the same amount of one-time revenue.
$3,300,000 DIFFERENCE
Types of Revenue
Amount
Valuation Formula
Margin
One-Time Recurring Revenue
$1,000,000
EBIT of 10% on One Time Revenue x Multiple of 7
$700,000
Recurring Revenue
$1,000,000
Recurring Revenue x Multiple of 4
$4,000,000
bundle high margin multiyear support, maintenance, and service contracts at the point of sale. Resulting in contractual stickiness, building monthly recurring revenue (MRR) and increasing valu- ation of the business.
Previously and presently, integrators selling traditional one- time capital expense sales struggle or don’t even bother selling multiyear support and maintenance services at the point of sale. Where, security-as-a-service provides an easier avenue to achieve sticky, contractual, high-margin multiyear support service sales. This builds highly-desired, sustainable, predictable MRR.
First, by adding multiyear support services at the point of sale you increase revenue by 30-45 percent on each transaction. Secondly, building MRR creates a groundswell of benefits to an integrator’s organization. Such as:
• Recurring revenue has a valuation many times greater than one-
time project revenue
• Sustained profitability (consistent source of higher-margin
sales)
• Weather economic downturns (MRR keeps the business afloat,
one-time project revenue disappears)
• Increased customer loyalty with contractual ties (create sticki-
ness)
• Improved customer engagement which often leads to other sales
opportunities, and
• Greater customer lifetime value (CLV)
QUANTIFYING RECURRING REVENUE
Provide a sense of the quantifiable difference in value of recurring revenue versus one time revenue. Look at two key financial met- rics – margins and business valuation. The table below compares the contribution of one million dollars of recurring revenue ver- sus one million dollars of one time revenue for each. (Table 1 uses conservative assumptions for average integrator margins on one time and recurring revenue. Table 2 uses basic business valuation formulas with conservative multipliers.)
The margin and valuation assumptions used in the tables above are not meant to be specific to any particular integrator. The purpose is to provide a reasonable basis to contrast the con- tribution made by recurring revenue to one-time revenue when it comes to margins and valuation. Whatever margin percentages or
valuation formulas are used, recurring revenue will always make a significantly greater contribution.
When analyzed from both of these perspectives; customer and integrator, it’s clear why financially astute integrators and their customers look to security-as-a-service as a more ideal and valu- able solution.
Adding an as-a-service offering as an option on a proposal, among a buffet of other procurement options, unfortunately doesn’t create MRR success. The integrators who do have suc- cess approach it differently than one-time sales. They implement a multilayer strategy that encompasses sales, marketing, services, and operations. All of the following mentioned tactics are essen- tial to successfully pivot to a service sales model.
The first tactic is leadership commitment. Results reflect the effort. Leadership must be a consistent advocate, understanding and believing in as-a-service. Then, they must inspect and en- force. Think milestones, objectives, scorecards and QBRs.
You’ll need a quality service offering you can deliver on. Pro- ductize it. Present your service offerings as an easy presentable package that’s a centerpiece of your value.
Next, find the right finance partner. A good as-a-service partner pays integrators in full, upfront, just like a cash transaction. You should never have to wait or get paid over time for selling a monthly subscription. Choose a finance partner that offers a true as-a-service offering. It should align with the subscription consumption model. Confirm that is focuses on use/access, not ownership. And lastly, a quality partner can provide value-added penalty-free provisions like rapid obsolescence protection and natural disaster coverage.
Invest in training sales teams. No matter how skilled a sales professional is, a service sale is different than the one-time sale.
Then, compensate your salespeople properly. If MRR is im- portant, pay your people for selling MRR. Don’t pay them over time, pay them upfront. It’s how salespeople are wired.
Lastly, share your message with the world. Integrate as-a-service and service-focused mes- saging into your comprehensive content mar- keting strategy.
Paul Metzheiser is the managing partner at TAMCO.
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