–By Michael Ketchum
Your company is unique. Your business and profit structures are unique. But your opportunity to achieve vast financial success in the channel is not. How, then, can you make the transition to Monthly Recurring Revenue (MRR)?
Let’s start with a little background on the Recurring Revenue model and Monthly Recurring Revenue (MRR). The Recurring Revenue model is a measure of the predictable and recurring components of your revenue stream, meaning you can predict, and bank on, that revenue continuing into the future for a contracted amount of time.
Monthly Recurring Revenue (MRR) is your recurring revenue paid in one monthly amount. Each single telecom, connectivity or cloud services sale is paid every month. Sell a service once, and get paid a percentage of what you sold, every month, for the life of the contract (typically three years).
Why should I transition to MRR?
The power of the Recurring Revenue model is that it creates a steady, predictable revenue flow. MRR reduces the peaks and troughs of your cash flow, offering stable revenue from single sales at regular, anticipated monthly junctures.
With the traditional transaction-method of bookings, you have to “reinvent” your organization month to month. You go out and sell products, you collect on those products, and the following month you start all over again—you sell new products, you collect on those products, and the process goes on and on.
With MRR, new sales build upon each other and the existing residual commission, and revenue grows as new recurring sales are booked. One of the key components to the residual commission model, The Rule of 78s, demonstrates how Recurring Revenue compounds very quickly, increasing the value of your business.
You also remove two areas of your business that can be a major headache to any organization: inventory and accounts receivable/collections.
- The Supplier Partners take care of the inventory, freeing you from warehousing and warehouse staffing, and losses from inventory obsolescence.
- Your back office administration is reduced, because account billing and collections are taken care of by the carriers/vendors/suppliers. You do not have to get bogged down in the day-to-day accounting, or worry about paying your vendors when revenue is tied up in accounts receivable. What’s more, by working with a Technology Services Distributor, you can have all Supplier payments reviewed for accuracy and combined into a single monthly payment, simplifying your admin ever further.
With the Recurring Revenue model, you are free to focus on relationships—on becoming a trusted advisor and consultant to your customers.
Isn’t transitioning to MRR a big change?
MRR is a different operational structure, with a different balance sheet. It will take time to build up revenue in the residual model.
If you are a full service VAR, you likely have back office administration, warehouses and inventory in place. You certainly do not want to lay off employees by changing your business model overnight.
You also want to maintain a good relationship with your bank. Banks may be unwilling to loan money without hard assets or inventory. You can still be just as profitable—and likely more profitable, as inventory and back-office administration expenses will decrease over time—but your bank may not understand MRR right away.
I recommend a measured approach when transitioning to MRR—you do not have to go “all in” and fully replace your current business model with the MRR business model.
Where should I start?
The good news is you probably already have MRR—perhaps in the form of customer service contracts or SaaS—so you don’t necessarily have to reinvent your whole business model in order to get started.
A good place to start is with new sales—and not necessarily all new sales. I recommend keeping your traditional core business in place, and set up new growth under the MRR model.
As you transition to MRR, your focus will shift to becoming a trusted advisor and consultant. You may be used to selling your own solution, but when you partner with Intelisys, you will be selling solutions from multiple Supplier Partners, so your focus naturally becomes finding the best solution for the customer.
About the Author
Michael Ketchum is Vice President, Finance, for Intelisys, and is responsible for managing all aspects of financial management, accounting and commissions.
