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Tigerpaw Blog

Top 5 considerations when building and pitching a recurring revenue quote or proposal

Learn how to build your own recurring revenue model, including quotes and proposals, with this five-step guide.

Netflix is doing it. Car wash providers are doing it. Managed IT providers are doing it. Why aren’t you?

Recurring revenue models are extremely popular, both with providers and end-users. No matter what business you’re in, you are likely looking for new ways to propose solutions to your customers. Whether you’re in IT services, VoIP, A/V, security and alarm, managed print services or anything else, you know that your customers’ buying habits are changing and you want to stay on top of the innovations in billing models to not just keep up with the pack but to leave them in the dust.

 

The answer: recurring revenue.

If you are currently billing your customers for time and material, variable rates like cost per page or cost per incident, your business could be in danger. Here is a guide to help you to more easily (and safely!) build your own recurring revenue model, including quotes and proposals, no matter what line of business services you deliver.

Let’s dive right in:


1. Get past the myth that your business couldn’t successfully run a recurring revenue model

If you are in managed print, VoIP, A/V or security, you may be wary of delivering a fixed, recurring rate for services every month. You likely believe that you have too many variable costs for this to work. As we’ll illustrate, this need not be a fear.

Keep an open mind as we continue to dive deeper.


2. Up your assessment game

The first step (and, I think, the most important as it becomes the foundation for everything to follow) to building a recurring revenue proposal is to get as much data as you can. Data is king. The data is out there. And tools exist to help you get the data.

Data will show you that your customers are more predictable over time than you think. The managed IT services and managed print services worlds have figured this out and employ software tools designed to get that data. Your first job is to find the right tools and conduct a thorough assessment.

My pedigree is in the office equipment and managed print world, so I’ll give you an example of what to collect. If your business is different, use this as a reference to start thinking about the kind of data you will need to collect:

  • Printer and MFD data: Pages per month, pages in color vs. mono, historical trends over longer periods of time via toner invoices and meter reports.
  • User data: Tools gather who was printing, what they were printing, when they were printing, right down to the application level.
  • Workflow data: Are there processes in their print environment that are broken? Are they printing color email when they don’t need to? Is there a lot of personal printing? Are they printing to expensive devices that aren’t built for the volumes being dumped on them?
  • Existing costs: Gather ALL the current spend information you can, and be granular! Again, using my experience from the world of office printing, I don’t just ask how much they spent on print. I find out how much per page and break it down by color and mono as well as by device class. The better I understand the full breakdown of costs, the more likely I am to succeed in building a good flat rate recurring model.
  • Analyze industry trends over a five-year period: When I was building a recurring revenue model for the print industry, I worked with industry groups like Gartner, Photizo and others to understand user print behavior over time. What I discovered is that users were printing, on average, 5 percent less every year. This is important because I knew that the risk for rising costs on a flat rate model were non-existent. Users print behavior, over time, was extremely predictable.


3. Roll up your sleeves and work the maths

Once you believe you have gathered the right information, do some revenue and cost calculations.

Build a calculator examine current costs vs. future costs: When I built the seat model for the managed print industry, I created a calculator in Excel. It made it exceptionally easy to input numbers for existing costs based on variable usage and come up with pricing on a recurring model. Your calculator should just be a straight conversion, and it should include ways to make the recurring offering much stickier.

Considerations for this: Are there workflows I can positively impact to drive out cost? In the office printing world, people print too much color, not enough duplex and things that might be better if they were never printed at all. Software tools can drive out as much as 30 percent of the customer’s current spend while delivering 6 percent to 10 percent additional margin for the provider! Contact me to discuss how to do that for your business.


Learn about “value-based billing” models that exist already: By user or by seat is common. You’ll want to break out the quote based on seats and bands. Bands are essentially seat pools to ensure the bill is the same every month, because users love predictability, not variability. So, for example, a value-based seat band could cover the customer for 96 to 110 users. If they go on a hiring spree, you can quote them on the next band, from 111 users to 120, etc. Most providers use a 10 percent buffer in their bands to account for monthly variability.


4. Ensure you have a good value proposition to go with the pricing

Once you’ve come up with a recurring seat price for your prospect, you need to discuss why switching would be valuable! A solid value proposition will be critical to adoption. Here are a couple of examples of what customers will be looking for you to provide:

  • Budget-ability: The problem with most variable pricing models is that it’s hard for customers to get budget approval for things that cost different amounts all the time. When they ask “how much?” and you say “that depends” you have a problem. When they ask “how much?” and you say “$24 per month per seat with a one-year commitment,” you will get their attention! They can submit that and have a much higher likelihood of budget approval.
  • Workflow Improvement: Like I said, in the managed print world, office printing and user behavior is all over the map. If you can reduce color spend, give them better ways to share information and give them back more time for other business critical issues, well, you’ll get their attention!


5. Develop a contract with “fair play” clauses

As you are going to base your recurring revenue quote or proposal on existing behaviors, you need to make sure you are covered for any unusual changes in behavior. Again, because of my pedigree in office printing, I’ll share some examples of fair play clauses from that world:

  • “The customer shall not bring any outsourced printing back in-house without informing us. This will likely increase the seat pricing as significant changes in volume will lead to significant costs for us as your provider.”

  • “If there are printing assets we will not be managing that are not covered under our seat program, and significant volumes migrate to devices under management, an increase in the seat price could be expected.”

  • “Some of the savings in the new recurring model are based on rules impacting workflow. The customer agrees that if they wish to make changes to those workflow rules that it must be discussed with the provider so we can re-quote the seat price based on changes in said workflow.”



Staying competitive

If you follow the points detailed above, you’ll be well on your way to building recurring revenue quotes and proposals that will benefit both you and your customers. The most important thing is that you get started, and soon, before your competitors beat you to it.

I had an industry colleague contact me the other day because he LOST a deal to a recurring revenue proposal and he didn’t have the ability to propose one himself. Has it happened to you? It will! So make sure you’re ready.


Bonus considerations

Now that you have a good understanding of how to build a recurring revenue quote or proposal, here are some additional considerations to make sure you hit the ground running:

  • Consider moving your existing customers to a recurring model
    • Start with your least profitable customers and move on up the ranks. I’m sure you have a few customers that aren’t making you money. Start with them, practice on them and then once you’re good, start going after net-new opportunities. What do you have to lose?

    • Pay attention to cash flow and cash on hand. Sometimes transitioning requires more cashflow than you think, so run the numbers not once, not twice, not three times — run them until you are comfortable that your cashflow will allow you to transition your business model.
  • Make the process repeatable:
    • Use software tools like a business automation platform to gather and analyze the data and have a standard assessment practice that all of your people must adhere to.

    • Build an automated calculator: Make sure you have a tool that you can dump data into and have it do the hard work of processing your quotes.
  • Modifying sales rep compensation plans to drive new behaviors: Sales people are “coin operated” and do what they are paid to do, and they’ll keep selling the old way if you don’t pay them in a new way!

  • Have your marketing and sales materials ready before you start selling: Far too often I’ve helped providers who wanted to start selling before they had a webpage and other marketing collateral talking about their new recurring offering. When a customer says “I love it! Can you send me some more information on this offering?” and you say “we don’t have any”, well, you know how that’s going to end.

 

We've been there

Of course, there is no way to teach you everything about how to build and deliver recurring revenue proposals, but I trust that I’ve given you a good framework to feel comfortable getting started.

Just over five years ago, Tigerpaw sold software just like everybody else: The customer would buy the software upfront and pay an annual maintenance fee for the latest and greatest feature. Today we are 100 percent subscription, recurring revenue. 

Let us help you. First, you're going to want to find the right business automation software for your business that can not only gather and analyze data but also track recurring revenue contracts. Download our PSA Checklist to see all the technology services industry-recommended features and tools you should be looking for.

Download our PSA Checklist and find the right professional services automation platform for your business.

Apr 23, 2019 9:52:00 AM / Posted by West McDonald

Tags: Contracts & SLAs, Quotes and Proposals