Business

Why Recurring Revenue Skeptics Are Missing the Point

Recurring monthly revenue (RMR) may not be necessary to drive company valuation, but providing great customer service absolutely is.

Why Recurring Revenue Skeptics Are Missing the Point
You can do the math, but if your clients aren't receiving excellent customer service you won't survive in tomorrow's service-oriented world.

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Conversations about recurring revenue, recurring monthly revenue or RMR have long made the rounds in our industry. At OneVision, we see firsthand a growing number of integrators embracing the possibilities, gaining significant wins and charting a clear path forward.

However, others in the industry have grown leery of the RMR message. Citing a lack of widespread momentum within our channel, some have begun to dismiss the RMR message as one of would-be “soothsayers,” spreading a message of fear through the RMR-or-bust gospel.

A recent article by Steve Firszt here on CE Pro speaks to the latter group, accusing RMR-believers of stating that “custom integration companies have no value without recurring monthly revenue.”

Firszt goes on to argue that, while RMR may be a nice a benefit to a potential investor, enterprise value can be driven in its absence so long as your company runs on a standardized management system which can be benchmarked against others in the industry.

Recurring Revenue Actually Isn't the End Goal

While I agree in spirit with what Firszt is saying — that RMR is not an exclusive requirement to drive enterprise value — I believe his article misses a critical point which is often absent in industry conversations about recurring revenue.

For too long RMR has been discussed as if it’s a goal in and of itself — just go create some service plans and start selling them, right? It’s akin to an employee seeking a raise without a single thought given as to how they’ll drive the additional value to support it.

What’s missing from this thought process, and Firszt's article, is that RMR is in fact a byproduct of providing excellent customer service. And whether or not you chose to go after recurring revenue, having a well-defined and repeatable process for taking great care of your clients is arguably one of the most important factors any savvy investor would look for when considering the purchase of your business. 

If the future of the consumer technology experience revolves around service, then the future successful company must have an excellent, standardized service process. Without that, today’s smart-home integrators will likely not thrive in tomorrow’s service-oriented world.

It’s All About Service

In spite of all the expertise and sophisticated technology the CEDIA channel provides, we are first and foremost in the business of service. Regardless of how well projects are executed, or the quality of the components installed, technical issues will always arise. And your ability to quickly and consistently respond to your clients in their moment of need is the single largest driver of their overall technology experience.

Meeting these service demands has always been the hallmark of top-notch integrators. And the value of reliable, around-the-clock service as the last true differentiator is only growing as the products and technologies that drive the smart home continue their inexorable march towards commoditization.

Any potential buyer who understands the dynamics of our market will surely know this. Without a fully operationalized method for consistently providing your clients with a premium service experience, how will you explain your plan for client retention and growth to an investor in the face of rising service demand and exploding smart-home competition?

What Investors Really Want

Dismissing RMR outright, while giving a total of five words to the importance of customer service (“Customer service would be enhanced”) could easily leave a casual reader with the impression that service is not a primary driver of enterprise value — a conclusion I wholeheartedly disagree with.

RMR may not be a necessity to drive company valuation. But great client service unquestionably is.

Whether or not you’re thinking about RMR, today’s market dictates that now is the time to modernize your service operations. Especially if you’re thinking about an exit strategy. In a market with falling technological barriers and increasing competition, the biggest value in your business will be the relationships you have with your clients. 

So take the time to formalize them with service agreements and prove that you can maintain healthy, active, and profitable relationships with your clients through the consistent delivery of exceptional service. Otherwise, your clients’ technology experience will fall short, along with your company’s attractiveness to investors.


For more information about service and using it to create RMR, visit www.onevisionresources.com/blog.



  About the Author

Joseph Kolchinsky is the founder of OneVision Resources and investor of companies in the personal and home technology industry. He is also a frequent speaker on the evolving nature of supporting the connected home and related IoT. Have a suggestion or a topic you want to read more about? Email Joseph at [email protected]

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Comments

Posted by Joseph Kolchinsky on June 29, 2017

Hey Steve - that extra detail makes a lot of sense - totally appreciate you chiming in with it.

I think that if you assume/acknowledge the inevitable and currently occurring increase in service demand then the companies you’re bringing together will have to have a standardized service strategy as much as you believe they’ll have to have a standardized operations strategy.

I love what you guys are doing - we’re both standardizing the way our industry does business.  We should keep working together on any companies we have or will soon have in common.

best,
Joey

Posted by S1szt on June 29, 2017

When a CI company discusses “exit strategy”, the owner is looking at 3 options:
1) Sell the company to an outside party
2) Sell to family/employees
3) Close down and walk away.

Across the US, the third option is the route most often taken by small business owners. Not just CI’s, but small businesses in all kinds of industries. Mainly because the owner usually IS the business. S/he’s not selling a company, s/he’s selling a job. There aren’t a lot of deep-pocket candidates looking to buy a job.

This is where RMR can provide the CI owner with a viable exit strategy. Security RMR has proven itself attractive to investors – who are happy to buy the security accounts but care little for the integration part of the operation. Service RMR, or companies that have great customer service? To-date, not so much.

That doesn’t make service RMR bad or hopeless, and it certainly doesn’t imply that great customer service is not part of the investor equation. But without security RMR, single-location CI’s have no track record of attracting high-multiple buyers.

Our point – and the ONLY one I was trying to make – is that some operating standards for the industry would make companies more valuable, even absent RMR (not all CI’s can, or even desire to, enter the security business in a meaningful way). OneVision wants standards for great service. Awesome! We’re promoting standards for the management system: how/when revenue is recognized, what comprises cost-of-goods, whether an inventory asset should be maintained, what metrics should be used to benchmark and compare companies. To mention a few.

VITAL helps companies learn and adopt such a management system. We will soon go to market with a group of these companies. [comment edited by CE Pro]

Posted by S1szt on June 29, 2017

When a CI company discusses “exit strategy”, the owner is looking at 3 options:
1) Sell the company to an outside party
2) Sell to family/employees
3) Close down and walk away.

Across the US, the third option is the route most often taken by small business owners. Not just CI’s, but small businesses in all kinds of industries. Mainly because the owner usually IS the business. S/he’s not selling a company, s/he’s selling a job. There aren’t a lot of deep-pocket candidates looking to buy a job.

This is where RMR can provide the CI owner with a viable exit strategy. Security RMR has proven itself attractive to investors – who are happy to buy the security accounts but care little for the integration part of the operation. Service RMR, or companies that have great customer service? To-date, not so much.

That doesn’t make service RMR bad or hopeless, and it certainly doesn’t imply that great customer service is not part of the investor equation. But without security RMR, single-location CI’s have no track record of attracting high-multiple buyers.

Our point – and the ONLY one I was trying to make – is that some operating standards for the industry would make companies more valuable, even absent RMR (not all CI’s can, or even desire to, enter the security business in a meaningful way). OneVision wants standards for great service. Awesome! We’re promoting standards for the management system: how/when revenue is recognized, what comprises cost-of-goods, whether an inventory asset should be maintained, what metrics should be used to benchmark and compare companies. To mention a few.

VITAL helps companies learn and adopt such a management system. We will soon go to market with a group of these companies. [comment edited by CE Pro]

Posted by Joseph Kolchinsky on June 29, 2017

Hey Steve - that extra detail makes a lot of sense - totally appreciate you chiming in with it.

I think that if you assume/acknowledge the inevitable and currently occurring increase in service demand then the companies you’re bringing together will have to have a standardized service strategy as much as you believe they’ll have to have a standardized operations strategy.

I love what you guys are doing - we’re both standardizing the way our industry does business.  We should keep working together on any companies we have or will soon have in common.

best,
Joey