Exploring the Potential Recurring (or “Re-Occurring”) Nature of Services Revenue
In the minds of many investors and business owners, services revenue tends to be an afterthought when discussing recurring revenue. Although the unit economics on services certainly vary from what typical recurring revenue streams (e.g. subscription, license / maintenance, support) provide to companies, it is important to understand and properly position the value that a variety of services offerings can offer to businesses. While these demonstrable examples are not always applicable to every business, they serve as helpful cases to highlight how services can be treated and positioned as a source of recurring / re-occurring revenue by business owners and investors.
Case #1: Consultative Services that Complement Solution Offerings
As businesses scale and mature, new and enhanced offerings are consistently explored and implemented to best serve customer needs and sustain the company’s growth. Whether it is a new module within a solution suite that provides customers an entirely new way to execute a workflow, an improvement of an existing solution / feature to address customer requests or just plainly a modernization of the platform through adoption of new technologies (e.g. adding mobile functionality to an existing web-based platform; shifting from on-premise to cloud-based infrastructure), businesses are continually evolving to generate new sources of incremental revenue. In the case of services, consultative offerings are a potentially lucrative source of new revenue that can provide companies with a highly visible, recurring stream of revenue.
Consultative services are a unique way for companies to provide their customers with a way to explain how the solution suite can be used in the most effective and efficient manner, and how to best interpret results / outputs that arise from the platform. This is most simply deployed in a manner where the company dedicates one or a set of their solution specialists to a customer, who then provides the company with an upfront payment each month, quarter or year. Over time, these re-occurring, upfront payments become a valuable and predictable stream of revenue, while also creating opportunities to increase adoption of solutions, as customers become more knowledgeable on the benefits of the platform. The below example highlights the merits and considerations of consultative services:
Case #2: Training Services for the Solution Suite
Akin to consultative services, training services provide another avenue for companies with a solution suite to extract incremental revenue from customers. By offering recurring training offerings on how to use the platform, companies become a trusted resource for customers and users alike to learn how to fully leverage a platform in its most complete, intended manner. Training services can further entrench the customers into the company’s solution suite, leading to increased user understanding and adoption, and ultimately, more recurring revenue for the company in the form of additional subscriptions, licenses and services sold.
There are a number of common methods to deploy recurring / re-occurring training services for customers, but the two that we will specifically explore here are: 1) user conferences / periodic “classroom” training sessions to be attended by customers in need of platform training; and 2) creating a training services online portal that customers / users can pay for and access for training modules that help further their knowledge of the platform. Let’s dig deeper to understand the potential value of each of these offerings.
Case #3: History of Repeated Services in Existing Customer Base
Although not a specific offering, repeatedly purchased services within a company’s existing base of customers can highlight how services can be deemed as recurring / re-occurring in nature. After companies initially implement solutions with new customers, there are many future services opportunities that arise, typically coming in the form of implementations for module add-ons and additional existing solution configurations and customizations.
In each of these identified instances, a detailed understanding and explanation must be developed to support why these services are recurring / re-occurring streams of revenue. Here, we will conduct an illustrative analysis that can be used as a helpful reference point for companies seeking to further understand and highlight how certain services can be positioned as recurring / re-occurring in nature.
Concluding Thoughts: The Value of Re-Occurring Services Revenue
Although services have a connotation of being less predictable and “lumpier” in nature, the above examples show a variety of instances where services can deliver consistent, re-occurring value for businesses. These examples provide a view into how businesses (particularly those in the software world) can position and effectively monetize service offerings and revenue in a repeatable, visible manner. By understanding that services revenue can be positioned as such, companies can not only provide higher value service offerings to customers (e.g. consultative / training services, user conferences), but can position their business model and financial profile in a more beneficial light.