Recurring Revenue vs. Repeatable I.P. for Microsoft Partners
We obviously have a vested interest in the I.P. game, and so I listen to a lot of people. A couple of people in particular are Brent Combest (@BrentCombest, Microsoft’s Minister of Profitability) and Dana Willmer (a consultant who adds analytical beef to Brent’s proselytizations).
If you follow these two, and dive into the voluminous information cache they have developed, you can earn your I.P. Degree. While these two know what they are talking about, I also hear a lot of noise from people who do not. One of those cringe makers is hearing the terms “Repeatable” and “Recurring” used interchangeably. We can’t blame Microsoft for the naming confusion this time as they did not coin either of these terms.
“Can you do that again… just like the last time?”
Repeatable I.P. is usually referring to a process rather than a product, and is often performed only once per customer. It is that “Recipe” that I referred to in a prior post, made up of particular steps, services and components, that when applied, according to the recipe, will produce a consistent result. Consistent does not mean identical. For example, let’s say you have built an automated cookie machine. A Customer can come to a website and order your cookies and your process kicks in and makes the batter, bakes the cookies, loads them in a box and ships them to the customer… identical cookies every time. But let’s say that 90% of your cookie process is standardized, but on your website you allow the customer to add a single ingredient of their choosing to the base cookie, like chocolate chips, or macadamia nuts, or kalamata olives. This is still a repeatable process, that provides a consistent, but not identical result. This is kind of what our RapidStart CRM is, a repeatable process, that provides a consistent, but not identical result. Skykick would be another example, while the result of their migration service is consistent, it is not identical, because while the target may be the same, the sources are not and the Partner adds that source (ingredient) to Skykick’s repeatable process.
“Can you do that thing for me, just like that, every single month?”
Recurring Revenue is this idea that you are taking something and offering on some kind of interval basis. This can be a regularly performed service, or access to something that is code based. Many Managed Service Providers have moved to this model; for a monthly cost, they will be there for the customer. This can be offered in lot’s of different ways and MSPs and others are spinning the dials to get the right combination. One of our CRM Partners performs a quarterly review with their customers to see where they are struggling, or present new opportunities they might want to explore. The cost for this is included in a small bump to the per user monthly cost. It is kind of ingenious when you think about it, the customer is actually paying them to come around quarterly to upsell them services. Some MSPs are also doing this, but frankly, I think every one of them should. Instead of hanging around waiting for things to break or providing some basic admin support for an extra $10/mo/user, add another $3 for a quarterly assessment. Your sales people are probably doing this for free now in their upsell motions. By charging the customer anything at all, your sales pitch just became a benefit.
Much of recurring revenue is code-based, I mentioned Apps in the first post about this, but that is not the only kind of code-based I.P that can be recurring. Almost everything Microsoft offers is moving to this per/user/month model, and it is all code based. Okay, not everything they offer is code-based, you still have to shell out up front for your Xbox, but what if they did offer the Xbox console for $25/month? The cable companies do it with set-top boxes. If you look at PinPoint today, under Applications, you will see the whole gamut, from small “apps” for a few dollars per month, to full-on CRM solutions for thousands of dollars a month, as well as things like us, for a one-time cost.
Mashing up Repeatable I.P. with Recurring Revenue
Let’s say our cookie maker above gave their customers the option to have those cookies automatically made and shipped on the first of every month. This Repeatable I.P. just became Recurring Revenue. Brent will tell you, emphatically, that recurring revenue is the new valuation metric for technology companies. Sell once, collect forever. If you can take your unique, Repeatable I.P. and offer it as a subscription, instead of a one-time cost, you are heading down the path to higher valuation. But this path is not necessarily smooth. The biggest obstacle is Churn. If you sign on 10 new customers a month to your subscription, but 2 prior customers cancel every month, you have a 20% Churn Rate. Obviously this is a significant factor, at a 100% Churn rate (10 gained/10 lost) your growth rate is zero. A high churn rate means that something is broken. I am going to do a deep dive on Churn in a future post.
Can one-time Repeatable I.P., be Recurring Revenue?
We we certainly hope so. While our RapidStart CRM “Repeatable I.P.” is only performed once per customer, every time a partner sells a RapidStart CRM, our revenue recurs. For a company like us to demonstrate recurring revenue, in Brent’s context, we need to be able to show that every month our Partners are selling more RapidStarts. While we won’t suffer a churn problem per se, we have our own challenges that are just as crucial. The number one challenge for a solution like ours is getting a new partner to sell the very first one. It is only after that first one is sold and completed that all of our talk about “Risk-Free“, “Easy” and “Profitable” moves from theory to reality in a Partner’s mind, or not. If we fail to deliver on those promises, that Partner will not sell RapidStart CRM again, and that is our equivalent of Churn. A one-and-done relationship model does not build a very big business. In fact, in our Go-To-Market discussions with Tech Data, they don’t consider a partner truly “onboarded” until they have sold something three times!
If you go down the path of Repeatable I.P. like we did, where you basically pivot your entire business model around it, be prepared for some frustration, particularly if you go the channel route as we have. I can empathize with Microsoft more now. By moving to a channel model, we have placed partners right between us and the customers. We have added an additional sales cycle to the mix. First, we have sales cycle with a partner to convince them that our solution is great and get them to sign up as a reseller (this is actually the easiest part). But now there is a second sales cycle between the partner and their customer where we can do little more than twiddle our thumbs and wait. I will write another post on motivating resellers, as soon as I figure out how to do that.
I would appreciate some feedback in the comments, if for no other reason, so I will know I am not talking to myself.
[info type=”info”]Non-Confidential Information Notice. This post was written by Steve Mordue who is a member of multiple Partner Advisory Councils and is therefore subject to an Enhanced Microsoft Non-Disclosure Agreement regarding information conveyed to PAC Members. All opinions expressed are solely those of Steve Mordue, and no information provided herein is subject to the NDA. Basically, Steve knows a lot more than he let’s on; He’d tell ya, but then he’d have to kill ya.[/info]