Does Your CSB Business Have a Recurring Revenue Growth Plan?
By Dave Zwicker
According to research conducted by The 2112 Group, solution providers expect to grow by 11-15 percent in 2014, three to five times the industry average. Those are some great expectations.
However, the same market research reveals that 81 percent believe in the necessity of a formal growth strategy for guiding investment, operations and performance, yet only 54 percent report they have such a plan. That's a 27 percent gap in execution. Is your business caught in the 27 percent gap?
Having a growth plan is especially critical for a recurring revenue business. Here's why:
- Revenue and profits are spread over a 12- to 48-month contract term
- The upfront acquisition cost must be funded by incremental profits
- Adding commodity cloud services will dilute your average gross margin
- Mixing in managed and professional services will improve gross margins
- Long-term revenue growth means driving consistent deal acquisition
- Consistent deal acquisition means managing a consistent lead funnel
- Alignment between your revenue and lead-gen targets requires a plan
Taken together, these dynamics will impact your business in a variety of ways — from cash flow to resource investments to net profitability — and will ultimately determine your business valuation. And strategically, you need a plan for weathering the approaching storm of channel consolidation as the IT service providers who successfully incorporate cloud services into their solutions thrive, while those who fail to adapt will not. According to The 2112 Group, 70 percent of solution providers are planning to add vendor cloud services to their portfolios.
A recurring revenue business growth plan shows what your business will look like over a three-year time horizon. If you have such a plan, does it project the same 11-15 percent growth targeted by your peers? How profitable is your business during this time frame? What investments do you need to make in your solutions portfolio and your sales and marketing engine?
If you don't such a have a plan, here's how to build one.
Understand Your Growth Factors
Start by calculating the unit economics that drive your business. What are your average deal values? These values include the average one-time revenue (OTR) value and the average monthly recurring revenue (MRR) value for a typical service contract as well their respective gross margins. Average deal value is one of the most important building blocks for your recurring revenue business.
Deal Acquisition Rate
Now take your average deals values and model the cumulative recurring revenue and gross margin generated over time based on the number of deals you need to acquire each month. You can do this two ways: (1) Using your current deal acquisition rate based on historical data and (2) Defining a target deal acquisition rate that is needed to drive your business to meet long-term revenue targets or to achieve an 11-15 percent growth rate to match your peer group.
Revenue growth is a function of these two growth factors —average deal value and deal acquisition rate. After you model your growth, you may find that driving the level of revenue and profit you would like to achieve requires adding new services to your portfolio. The growth planning process could very well lead to expanding your solutions and offerings to increase deal size or to improve gross margins. Otherwise, your business may not throw off enough cash to fund growth.
Now that you have a business growth plan with well-defined targets for average deal size and frequency, you can turn your attention to building a lead funnel with enough activity to drive that growth. This is true business and marketing alignment. If you need one new deal every month to meet your business goals and you are able to close one deal for every 10 leads, then you will need at least 10 leads added to your lead funnel each month.
These are the basics of a recurring revenue growth plan that ties to sales and marketing execution. Of course there are many more layers of complexity, such as minimizing your cost of deal acquisition and optimizing your funnel for lead quantity, quality and conversion rate. However, these are topics for another post.
If you want to get started, you can download some free business growth modeling tools as well as a funnel metrics modeling tool that will enable you follow the planning process outlined above. They will help ensure that your business is not one of the 27 percent that recognizes the importance of business growth planning but fails to execute on this critical success factor.
Dave Zwicker co-founded CSBcommunity.com, an online business-building center for cloud service brokers (CSBs). The CSBcommunity.com website is operated by CSBexcellence, a consultancy also co-founded by Zwicker, which offers an inbound marketing tool kit for CSBs. The CSBexcellence team guides channel partners through a structured methodology for creating a scalable and profitable CSB business and implementing a “lean" inbound marketing engine for fueling the sales funnel and driving business growth. During a successful marketing career spanning three decades, Zwicker has held executive assignments with leading technology companies offering voice/data systems, security solutions, application performance management software and managed voice services.