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Keep the revenue flowing with an annual recurring revenue model

January 10, 2022

Think subscriptions and bundling services

For many years, recurring revenue business models, sometimes described as subscription- or usage-based models, have been on a steady uphill climb, driven by consumer demand. People subscribe to Netflix and Amazon Prime to watch their favorite shows, Apple Music and Spotify to listen to their favorite tunes and even companies like Dollar Shave Club to ensure their favorite razors regularly arrive on their doorstep. However, subscriptions aren’t just thriving in the business-to-consumer world.

Increasingly, they’re becoming a business-to-business (B2B) mainstay, as they offer several substantial benefits to buyers and sellers alike. Subscriptions allow B2B buyers to replace the large capital outlays that come with traditional purchases with affordable monthly payments that can scale as the business grows. Sellers see higher customer retention rates as satisfaction is aligned better with the value of the recurring services and the relationship is ongoing versus one-time or infrequent. As the proliferation of subscriptions rise, so will the opportunity to create and grow with an annual recurring revenue (ARR) model.

The age of subscriptions is underway, according to Forrester. If you’re an IT solution and service provider that hasn’t already tapped into this thriving market, there are plenty of reasons you should consider it. This includes a constant stream of income, embedding yourself as a consultant to your customers and new cloud-based opportunities.

How ARR is calculated

It might be a given, but ARR is a business metric designed for subscription-based companies. Its calculation depends on factors that include existing pricing strategy and complexity of your business model. Think basic, intermediate, and premium service or add-ons.

ARR equals yearly subscription cost plus recurring revenue from add-ons/upgrades minus money lost from cancellations.

CFO research study showed that 23% of C-suites and boards were incorporating recurring revenue models into their business plans. Subscriptions add predictable sales that lead to recurring revenue that helps with cash flow, which is particularly important during slower business cycles or seasons. Along with providing dependable, repeat business, the model helps you further embed yourself into your customers’ businesses.

For example, perhaps you provide IT solutions to a customer looking to bolster its security and needs more storage. Offer to provide both on a subscription basis. Remember, subscription models extend beyond software as a service (SaaS) and into anything as a service (XaaS) — desktop, data, marketing, security, even hardware — the list goes on. So, too, do the opportunities for ARR.

How to get started

By becoming a one-stop shop for customers, you’re providing simplicity and reliability. The challenge for some IT solution and service providers, however, is getting started.

One idea of dipping your toes in the water is to start with a seed product followed by bundled services. Say you offer something just about every business uses like Microsoft Office. Then start layering on consumption-based value-added services, such as a cloud storage, backup and recovery package. Does a customer lack sufficient security? If so, bundle that into the package as well.

The sky is the limit regarding the cloud services you can provide and the ARR you can bring into the fold. The key is to understand your customers’ needs — and sometimes you must suggest those needs to them — and deliver.

Remember, too, that if you want to get into the ARR business you should incentivize your employees accordingly. If they’re used to selling large hardware and software packages that come with a lump sum payout or bonus, change to an incentive plan that rewards them for closing numerous, smaller deals.

Becoming services-led

Customers today want the businesses they deal with to provide services — not just hardware or software. Even if this is new for you, it’s doable.

Consider Xerox, a business long known for its printers. The company currently delivers printers and scanners along with IT services for small- and medium-sized businesses. In fact, it supports many of its customers’ entire IT infrastructure.

Similarly, the NCR Corporation of today provides so much more than the cash registers of its 130-plus year heritage. NCR now provides hardware that includes point-of-sale terminals and bar code scanners along with software, managed and professional services, among other things.

Taking that first step

By establishing and growing a profitable, sustainable cloud services business, you can incorporate ARR and increase customer satisfaction along the way. Consider starting small with a seed product/service, and then bundle other solutions, depending on your customers’ changing needs. Think about changing your compensation structure for employees used to selling larger purchases.

Lastly, Arrow can help. Our experienced employees have assisted plenty of IT solution and service providers beginning to use an ARR model. With ArrowSphere, our cloud and subscription management platform, you can easily combine well-known hardware and software services with your own to create a unique recurring revenue-based service catalog for your customers.

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