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How to Make the Switch to a Recurring Revenue Model

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The IT industry is evolving at lightning speed. Your customers are focused on digital transformation as they look to drive innovation and be more responsive in an ever-changing business landscape. As they continue to embrace cloud technologies, the tried-and-tested model of long-term software licenses or upfront hardware investments is fast losing relevance.

New models, like monthly subscriptions, software-as-a-service or per-user contracts, now represent more than half of all software implementations. By 2020, more than 80 per cent of software vendors will change to a subscription-based business model. These more flexible arrangements will ultimately benefit your business, allowing customers to scale up more easily while delivering predictable, recurring revenue streams.

But as a reseller this shift also requires a significant transformation of your operations, reshaping your sales process and customer relationships, even changing the way you generate business and measure results. Here are three ways to ensure the transition to a recurring revenue model is a smooth one:

Set Realistic Expectations

In the short-term, the shift to monthly subscriptions is likely to put pressure on your cash flow. The bottom line often takes a hit as you adjust to smaller, incremental payments. This makes it crucial to manage the expectations of key stakeholders while highlighting the advantages of generating more consistent revenue. The way you measure business performance will also need to evolve. A big deal at the end of the quarter won’t be enough to hit sales targets if you’re no longer receiving substantial upfront payments.

In the long run, recurring revenue streams will deliver greater value from loyal customers and you’ll have more opportunities to upsell extra subscription-based services. It also opens the doors to attracting new customers with cloud-based solutions. Adjusting your measurement framework and business objectives to take long-term value into account will ensure results don’t falter due to unrealistic expectations.

Prepare Your Staff

Adapting to the new dynamics of the cloud requires a significant cultural shift to motivate, train and compensate your staff. Sales people who are used to receiving commissions on large, upfront payments will find the move to smaller monthly revenue challenging, and it could impact the way they approach the sales process or the customer service they provide.

A new compensation model will alleviate some of these challenges and help shift the focus towards building and improving long-term customer relationships. To address this, you could pull a portion of the commissions on a contract into an upfront bonus or offer spot incentives to sell cloud services. You might also consider having two distinct sales teams – traditional and cloud – to help manage the change more effectively. A dedicated team focused on recurring revenue services is likely to outperform a team that’s responsible for selling products, which will help get everybody on board with the new direction of your business. 

Adapt Business Processes

Making an adjustment from long-term contracts to regular, lower value transactions may be a challenge for your accounting team, so it’s an important process to manage in advance. Decisions also need to be made about when to recognize the revenue from additional services surrounding new cloud-based solutions, like installation fees and ongoing support.

At the same time, your sales team can now sell several solutions to meet a single customer objective – bundling cloud solutions and managed services with traditional hardware or software licensing. To effectively unravel and assign these different revenue streams, clear lines of communication between sales and finance are essential. This will ensure everybody’s clear about how revenue for each product or service will be accounted for.

Summary

Over the next five years, more than $1 trillion in IT spending will be affected by the shift to cloud computing. Your business must adapt to meet the demand for cloud-based services and new spending models, or risk being left in the dust by a new generation of ‘born in the cloud’ providers. A smooth transition to recurring revenue will allow you to offer a broader range of services and deliver greater value to those customers seeking flexibility without the restrictions of an upfront investment.

About Rhys Shannon: As the Director of Cloud and Service Solutions for ANZ Rhys goal is to provide our customers with the solutions they want and need to better their business in a fast paced environment.