This post is part of a continuing series on hosted workspace services transition.
A central aspect of becoming a Workspace Service Provider (WSP) or Desktop-as-a-Service (DaaS) provider is shifting to a whole new financial mind-set: one of subscription-style services that generate recurring revenue.
This approach is good for everyone. Customers are ensured an always-up-to-date end-user DaaS style environment, a predictable operating expense, and always-available business partner. And service providers benefit from less customer churn, a smoother cash-flow model than ever before, reduced business risk, and higher/predictable valuations.
Why Hosted Services Recurring Revenue Rocks
Most traditional service providers are thinking about their business in the traditional way: transactionally. That usually includes a technical “break-fix” business, a per-project rate technical consulting rate, maintenance fees, etc. The impact of this is twofold: (a) customers treat their providers transactionally, rather than as a business partner, and (b) the sales organization is constantly under pressure to “hunt” for more business.
Contrast this with a business that workspace service providers are increasingly adopting: Where there is more line-of-business relevance, and where the relationship is more subscription-style. The results can be impressive:
- Customers treating their providers as a business partner – where price is not the only metric
- More touch-points in the customer than just IT – up to the business owner, and down to line-of-business unit leaders
- Smoother cash-flow – based on subscription-type services
- Less customer churn – due to ongoing relationship
- Overall evaluation – where valuation is more accurate, based upon actual cash flow rather than on customer lists and hoped-for lifetime customer value
You Can’t Become What You Can’t Measure
Moving to a model were the business is measured on selling recurring services necessarily requires different evaluation metrics – measuring the health of the business, sales effectiveness, and valuation. For example, core metrics to apply include:
- MRR – Monthly recurring revenue
- CMRR – Committed monthly recurring revenue
- ACV – Annualized Customer Value
- CLV – Customer lifetime value
- CAC – Customer Acquisition Cost
- ARPU – Average Revenue Per User
- Churn – Customer Churn
- AF – Activation Funnel
- ARPS – Average Revenue per Seat (nee, ARPU)
The takeaways from these metrics are that you must now care about monthly revenue, how it grows (from sales incentives) and when shrinks (from churn). You also want to compensate for net-new streams, be they net-new customers or footprint growth within existing customers. And you want to get early-warnings for possible churn customers, so you want to constantly measure satisfaction, Net Promoter Score™, and service/support inquiry rates.
There are a number of excellent pieces written about how service providers are using these “new” metrics; here are a few:
- For Entrepreneurs: SaaS Metrics 2.0
- CloudStrategies Blog: Don’t be a customer lifetime value simpleton
- Bessemer Venture Partners (blog): Get Instrument rated, and trust the 6C’s of Cloud Finance
- Bessemer Venture Partners (pdf): Measuring growth businesses with recurring revenue
Finally… What’s All This Worth to a Hosted Services Provider?
As mentioned, the impact of this shift can also vastly impact the valuation of your hosted workspace business, whether you’re just raising capital, or considering a form of exit. Demonstrating modest improvements in Average Revenue per Seat, CLV or even churn, can have very significant positive impacts on your overall valuation.
Skeptical? Look at an example like Box. In an excellent BusinessInsider article about Box, it was explained why a company with a relatively modest income should be valued so highly. Indeed, when Box when public, it was a perfect example of a billion-dollar baby IPO.
My next installment: Differentiation and Service Definition
For More Information:
- Transitioning to a Hosted Workspace Service Provider: Introduction
- Transitioning to a Hosted Workspace Service Provider, Part 1: The Right Goals
- [Blog] How big is the DaaS market?
- [Blog] Differentiate or Die – Why MSPs need to change their game
- Citrix Service Provider Program
- Andreessen Horowitz: Understanding SaaS – Why the Pundits Have it Wrong
- Quora: Other than churn, what are the key metrics in a subscription service?
- Fusebill: The 4 Key Metrics for your subscription business