Regarding recurring revenue, time is your enemy and speed is your friend. Here are five ways your business is suffering if you fail to produce recurring revenue:
New Service And Revenue Opportunities.
A typical systems integrator has a revenue split of 70% product and 30% services. With the continued decline of product margins and the onslaught of low-cost consumer electronics replacing once complex and complicated systems, technology professionals are looking for new revenue opportunities. Many of these new opportunities will come in the form of services, which will tilt the 70/30 scale. There is a large opportunity to add recurring revenue services into the mix which carry higher margins and demand higher valuations.
As technology becomes more accessible and affordable for the masses, a new mid-market opportunity presents itself to systems integrators. Many of these mid-market opportunities will involve an initial sale of $1,000-$3,000 and will have ongoing service fees associated with them. This model is similar to the one used at alarm.com — an ongoing service provided to the customer allows for remote access and control of basic electronics systems like alarm, video monitoring, and access control. This mid-market opportunity is massive compared with the traditional high-end automation systems in homes and businesses.
Predictable Cash Flow.
“Recurring revenue made my business recession proof” is a quote I’ve heard from security integrators. Having steady and predictable revenue from security contracts kept many of these integrators in a comfortable position during the last economic downturn. The bottom line is that recurring revenue provides stability, which can help ride out volatility in new sales or the general economy.
Recurring revenue builds value for your business. For an integration business with no recurring revenue model, your company is roughly equal to 1x your annual revenue. In other words, if you do $1 million in sales each year, your business is valued at approximately the same value. Conversely, for a recurring revenue-based business, such as a security integrator, the value of your business is 30-50x your monthly recurring revenue income. Do the math: If you’re a security integrator who books about $1 million in annual recurring revenue, then your business is potentially valued upwards of $4 million. That’s quite a difference!
You may be working hard to build your business, but what is your end goal? Ideally you plan on having that hard work pay off and you have an exit plan. The exit plan may be to turn your company over to your employees, fund your retirement through cash flow and profits, merge with another integrator and step out of the day to day, or sell your business to another integrator. Regardless of your strategy, recurring revenue will have a huge impact with improved cash flow, better valuation, and a stronger company position.
This article originally appeared here.
Michael Maniscalco, ihiji co-founder and vice president of technology, served as one of the principal architects of ihiji invision, the company’s cloud-based real-time remote network management solution. ihiji invision enables secure remote access, robust network management and proactive support while creating more reliable networks.