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Six Ways To Successfully Manage the transition from hardware sales to cloud-based monthly recurring revenue (MRR)

According to Gartner, one of the biggest challenges facing value added resellers (VARs) today is how to manage the transition from hardware vendor to a cloud-based model where monthly recurring revenue (MRR) is king.

There are two key challenges with the transition from selling capital items to selling a cloud-based managed service with recurring revenues.

The first challenge is the loss of the immediate gross margin associated with the sale of capital items. This margin affects the immediate cashflow and profitability of a VAR.

The second challenge is cultural. Sales people are traditionally focussed upon the big win. The $1 million purchase order is just far more satisfying than a contracted commitment of a mere $28K per month.. I have seen many VARs offer 2 or 3 months of MRR gross margin as their sales plan.   If you do the math, a sales person selling $1 million as a capital item with 15% of gross margin, would likely be paid, $22,500 in commissions. Compare this to paying 3 months of MRR gross margin which equates to just $12,600. Under this scenario, it would be a huge uphill struggle to change the culture from capital sales to recurring MRRs.

These two challenges aside, there is a groundswell from customers who are looking to move to a cloud-based operating expense model with managed services and with well-defined SLAs giving them the comfort of a defined delivery performance.   This shift alone makes it essential for VARs and managed service providers (MSPs) to build a cloud practice and align their businesses with these changing customer needs.

So, with all of these challenges here are six ways for traditional IT vendors to overcome these obstacles and get started on building a profitable cloud services business:

  • Don’t build … label – Building a public cloud infrastructure that easily and cost effectively scales requires a substantial up front capital investment that will likely be a major burden on cash flows. Given the change from capital sales revenues to MRRs have on the cashflow of a VAR, this issue becomes even more acute. Don’t reinvent the wheel, there are Cloud Distributors (just like hardware distributors) where you can buy and white label cloud services.
  • Create a “Cloud Suite” of IT products – customers are unlikely to move their entire IT infrastructure and applications to the cloud at once. Offering a suite of products such as back up, disaster recovery, cloud servers etc…allows IT Vendors to create a “cloud strategy” for their customers that transitions their IT operation and assets to the cloud over time. This also provides the VAR with the opportunity to begin the process of building their MRR stream.
  • Add Value – do not just replace traditional hardware sales with cloud IT. Build a cloud practice that adds value to your customers and builds incremental revenue streams that supplement your MRR. This can include services such as disaster recovery planning and testing, VoIP hosting and managed services such as server monitoring and back up.
  • Cash Flow Planning: Building an MRR stream changes cash flow in a very positive way but, it takes time. The days of “eating what you kill” are over. Selling cloud is substantially more profitable and stickier than hardware sales. However, many cloud services can be sold as an incremental revenue stream to capital sales. As an example, selling a high-end server, as a capital item, gives the VAR an opportunity to sell cloud backup for the application that runs on the server.
  • Compensation Plans: As given in the example above, compensations plans need to be modified to reflect the true value of winning long-term contracts. Two models have been proven to work well. Paying large commissions up front to make the winning of a long-term contract more beneficial to the sales person creates an immediate culture change but is costly in terms of cashflows. The other alternative that works well is to pay commissions, every month on the margins of the MRR. Sales people will soon see that they can create a book of business where their compensation will grow each month as they win new MRR deals. A good sales person will immediately see the benefit of this approach and commit to this method of doing business..   Given that gross margins are generally higher in the cloud business, there is a real opportunity to make compensation plans attractive to ambitious sales people.
  • The right partner – Align your business with a Cloud Service Provider that distributes an integrated suite of cloud services that can be fully white labelled to reflect your company brand. More importantly, do your due diligence and ensure that the CSP can support your business with training, marketing collateral, proposal and contract templates and best practices that will help you build your successful MRR business.

What other recommendations or suggestions do you have for implementing a successful transition to a monthly recurring revenue model?  We would love to hear about them.

 

Paul Butcher

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