While some services companies have built their business around a single, simple revenue model, others are expanding into additional revenue streams. As their customer numbers grow, so do their revenues—but in a more scalable manner that requires few (if any) additional staff members, overhead and/or resources.
In this Q&A, Christopher Miller, NetSuite’s Global Financial Architect - Strategic Initiatives, explains why successful services businesses are diversifying into multiple revenue streams and shows why now is the time to make the move:
Q: Why should services businesses be thinking about adding recurring revenue models?
A: It’s about economic value and generating predictable results from predictable revenues. Services revenue is really nice, but it’s a one-time thing. You get the business, you deliver the service and you get paid. So, when a services company is valued, there’s very often no value assigned to the actual services (versus the expertly-skilled consultants, who do represent value). On the other hand, when you have recurring revenue from a subscription model, that revenue is factored into the business’ value. In fact, I've seen multiples of 10, 12, or even 18 times monthly recurring revenue on an annual basis for companies that have branched out into new revenue streams.
Q: How can services businesses start to generate predictable revenues?
A: There are a few different ways to go about it. One way is to attach your company to an ecosystem. In addition to offering products serving specific industry verticals, you should be thinking about what additional services you can offer. Instead of focusing on accumulating and billing for hours worked, look at customer needs. If, for example, a customer asks for something two or three times, then there’s probably an opportunity to add a new service or product to the menu. Hours are nice because they represent quick money, but they’re not sustainable over the ecosystem. By creating recurring revenue through unique product offerings, your team will be able to leverage new opportunities in a very efficient and profitable way.
Q: Is “counting hours” a thing of the past for services businesses?
A: Well, you always want hours, but when you can turn your expertise into a subscription-type offering, you can multiply that experience in a way that doesn’t require more labor, more overhead, and/or additional resources. If you can weave delivery services into your subscription budget, then you can build out those revenue streams even further. For example, Ken Blanchard – a global leader in management training – has expanded its core offerings exponentially since its inception in 1979. The business initially developed a core training offering, which provided a set of course materials and on-site training. Today, Blanchard has expanded its offering to include digital assets, online courses and much more – allowing them to earn revenue without necessarily ‘counting hours.’ As Blanchard continues to grow, they’ve built on their successful training modules and courses to offer services that allow the business to earn recurring revenue without spending more time or resources on-site. Blanchard was able to build on its brand presence as a leader in management training and extend their product line into services that do not require many hours to complete.
Q: Can a services business start adding products to its lineup?
A: Absolutely. In fact, the lines between companies and industries are vanishing. Manufacturers used to focus on products and services businesses centered on services. Think about it: the best pitch you can have for your software is, “Hey guess what? We make hardware too.” We’re at a point where if you just think of your firm as offering services, you’re going to quickly find yourself going up against manufacturers and other firms that want to invade your turf.
Q: What are the hard parts of adding new revenue streams?
A: Some companies overcomplicate the process. The trick is to identify a need and solve it in a very simple, straightforward manner. And because you don’t have the capital and resources to chase every opportunity, you also need to say “no” to those that don’t align well with your core business model and mission. Focus on the core, and build a really good product, knowing that it doesn’t necessarily have to be the next industry disruptor. It can simply fulfill a basic customer need, but in a new and innovative way. Overthink this part and you’ll either miss out on the opportunity or lose out on market share when someone else jumps in before you do.
Q: Should services businesses be rushing to do this now?
A: There’s a battle for talent right now, and fewer people are qualified and capable of delivering services. That means that a services company’s “reach,” or ability to run an hourly-based business centered on manpower, is dwindling. The future population curve is not moving in their favor. That’s going to make it extremely difficult for a services business to attract enough talent and to then be able to bill at a top rate. At the same time, automation systems are getting smarter and smarter.
Q: How will this automation impact services businesses?
A: Every year, the list of basic tasks that services companies handle for their clients get shorter because it’s being sliced away at by a computer. Unless a services business has a very specific niche—and the smartest people in the world running it—they’re going to find at least some of their businesses displaced by automation. This creates tremendous opportunities for them to deliver automation in the form of an ecosystem, and in a way that best leverages their expertise.
Q: What’s the first step in the right direction?
A: Understand that to run a profitable, sustainable services business, you need more than just billable hours. You really need to look at adding new services and products to your lineup because the race to be efficient and diversify into new lines is only going to get stronger.
If you’d like to hear more about building multiple streams of revenue, please click here to download Service Performance Insight’s Report: “Building Multi-Revenue Stream Services.”
Source of the blog: Netsuite blog