Cloud services are growing five times faster than the IT industry overall, and VARs who have 50 percent cloud revenue make 1.6 times the gross profit percentage than those who don’t. Cloud is clearly where the market is going, but shifting to a cloud-based business could upend your entire financial model.
Cloud contracts are structured differently than traditional equipment sales and leasing, where you get your revenue upfront. With cloud, you’re paid based on the end user’s usage, creating a monthly annuity stream.
As you move to a cloud-based business, it may take many customers to build an annuity stream that compensates for the former upfront revenue. Your need enough cash to float your business until the monthly annuity payments deliver the cash flow to cover your costs.
Paying Commissions Upfront
To shift successfully, you have to create a sales culture around services while finding a way to compensate your sales team during the transition. If your business has been selling traditional IT products, your sales team will be accustomed to getting paid commissions for one-time implementations.
The simplest, most effective way to incent your sales team to sell more services and acquire new clients is usually by paying them upfront, based on the value of the cloud services contract. Essentially, you pay the commission before it is earned, but your sales team is incentivized to find new clients.
VARs find this is the best way to grow their cloud business, but it does create another cash flow challenge.
Cloud Financing Programs
Until you build up your customer base, shifting to an annuity-based revenue stream can put a financial strain on your business. You need the cash flow to run your business, while paying for a compensation plan that reinforces your sales goals.
Fortunately, there are several different types of financing that can help you take advantage of the fast-growing cloud market.
- Consumption-Based Financing
This is a solution that delivers upfront cash flow and revenue recognition of the entire solution for both you and your vendors. The best models should be vendor-agnostic and be able to accommodate private, public or hybrid cloud scenarios.
- Software Subscription Financing
Under this model, a financing partner funds the entire term of your subscription agreement, and handles all the back-office billing and collecting. A blind assignment of your subscription agreement may be required.
- Buy Backs
Some distributors will purchase your existing data center equipment and transfer it to a payment plan. This gives you cash forward, while you retain possession of the equipment throughout the term. You may even be able to upgrade the equipment at the end of the term.
- Partner Label Agreements
You can also sign an agreement with a partner, allowing them to use your branding to deliver contracts, as well as bill and collect in your name.
There are several cloud financing models available from your partners in the channel. As you shift to an annuity revenue stream, these financing arrangements can smooth the transition.
If you’re interested in learning more about how Arrow Capital Solutions cloud financing plans can help you shift to an annuity revenue stream, please contact Tim Bertrand (West) at [email protected] or Scott Riley (East) at [email protected].
Wayne Peters is Arrow Director, Sales/Financial Solutions.