Recurring Revenue Doesn’t Always Mean Monthly
The great promise of managed and cloud services to vendors and solution providers is predictable, recurring revenue. The model that defines that continuous money stream is MRR, or monthly recurring revenue. So strong is this notion of monthly fees that it’s nearly become bedrock in services.
Ah, but here’s the thing: “recurring” doesn’t necessarily mean “monthly.” And, there’s no law that says a services contract must be billed on a monthly basis. In fact, many service providers are shying away from MRR because of the high costs associated with managing the stream.
Building a profitable services business requires keeping revenues on an increasing curve while simultaneously keeping expenses steady or down. Cloud and managed services solution providers do this with greater ease since they need only build a process or capability once and reuse it. It’s the magic of replication and scalability.
The flaw in this grand design: Operations and profitability are contingent upon customers paying their bills on time. Failure to pay bills will ultimately result in disruptions and a discontinuation of services, but that only happens over a period of time. The interval between non-payment and suspension of service can be 30 to 60 days, depending on a service provider’s terms and conditions. Even when service is discontinued, the service provider must still chase down the customer to satisfy the outstanding balance.
And, this is the crux behind the rethinking of MRR. Many service providers say it’s just not the administrative headaches of doing monthly billing and collections when the monthly fees are often so low – it’s that the time and expense just aren’t worth the trouble.
The other problem solution providers entering cloud services face, is covering operational expenses. The average cloud contract doesn’t become profitable until the ninth or twelfth month. Even before the first contract is sold, a service provider must invest in the training, marketing and infrastructure required to sell, deliver and support a cloud service. All that expense is bore up front, and the initial engagement period is payback for the upfront investment. For many solution-turned-service providers, the expense/revenue gap is more than they can bear.
The Remedy: Change Billing Cycles
Some solution providers and vendors find it more advantageous to charge quarterly or annually rather than monthly for cloud services. This makes the bill much larger and therefore more important to administer and collect. And big lump payments make it easier to horde cash for operational expenses, sales commissions and new investments.
A big selling point of cloud services is that the fractionalized cost is more palatable. Instead of paying several hundred dollars for a software license, end users pay just a few dollars a month. Surprisingly, though, end users aren’t necessarily opposed to annual fees. The fees are still operational since they are recurring (which helps for tax and budgeting purposes), and they’re still only a fraction (albeit a larger fraction) of the total cost.
Revenue and cash flow are two of the biggest sticking points in the channel’s adoption of cloud services, but they don’t have to be challenges. You have the ability to set your own prices, payment terms and schedules. And, of course, you can engage with service provider partners like NetEnrich to defray your costs and improve your profitability.
Justin Crotty is senior VP and GM of NetEnrich, which provides closet to cloud services for MSPs and mid-market IT service providers. Monthly guest blogs such as this one are Talkin’ Cloud’s annual platinum sponsorship.
