One of the most promising business models for scalable growth monetizes the intellectual property created by a business to produce recurring revenue. This is the business model of software licenses and data subscription fees, but increasingly it is being successfully used in applications and services.
Today, probably the most attention grabbing use of recurring revenue business strategy is in the Apple Apps Store and similar ventures which invites developers to use a software tools set to produce useful applications that leverage it for iPhone and iPad. In rapidly scaled fashion these Apps have grown from nothing to more than 7.2% of AAPL revenue virtually overnight. AAPL recently announced that there are now more than 100,000 apps available for purchase for its new iPad.
While the Apps Store is a raging success, it is not the first use of recurring revenue business models. Software licenses, data subscriptions, magazine and newspaper subscriptions are all recurring revenue examples. At Global Energy Decisions, we used this recurring revenue business model to leverage our software and data into value added advisory products or Energy Apps in todays speak by analyzing the patterns in our consulting engagements to identify business needs we could “productize” into standard applications or services. This proved to be an extremely valuable marketing tool to demonstrate that our software for electric power market and risk analysis worked as advertised.
The logic was simple—often, the strategy, business analysis and growth challenges facing our business were the same as those faced by our clients. If we could develop apps for the common business uses of our core software products, productize them using our best practices, methods, and data, then deliver them as repeatable solutions to our customers along with our trusted adviser expertise—we had a winning solution that was the essence of a recurring revenue strategy:
“Build it once, prove that it works by using it relentlessly, and then sell it often.”
COMMON BUSINESS PROBLEMS
Today, the weak recovery from recession and global market volatility adds pressure to grow earnings in the face of weak demand, uncertain credit access, and rising business risk. Growing revenue from recurring sources helps smooth out the volatility of earnings and scale growth in these uncertain markets. Recurring revenue product strategies improve productivity and allow more time to increase hiring as markets recovery thus improving EBITDA.
These are the same global business challenges faced by your clients:
- Earnings growth in a consolidating world of global economic volatility and uncertainty,
- Global regions with the best growth opportunities also have high volatility exposures,
- Opportunities and risks of global trade, emerging markets and interdependent supply chains,
- Rapid change in disruptive technology, networks and IT/OT convergence and cloud computing,
- Access to capital for large scale infrastructure projects in uncertain economic times,
- Reducing greenhouse gas emissions despite energy demand and policy uncertainty
- Environmental challenges especially in emerging markets create both a world of opportunity and a world of problems to be solved to turn them into profits,
- Threats to the utility business model from smart grid, renewable energy, customer aggregation,
- Threats to large energy infrastructure from microgrid, energy efficiency and demand response,
- Threats from consolidation of market share by fewer bigger players across business lines.
For cleantech businesses especially those focused on the smart-grid enabled electric power space or in information technology services and software looking for those patterns of services requests or business pain points offers a strategic focus on scalable growth with recurring revenue solutions.
NEVER LET A BIG PROBLEM GO TO WASTE
The biggest challenge for recurring revenue strategy is not building it but conceptualizing what to build. The energy, water and environmental challenges facing China, for example, are vastly different than those here in California and so are the economics, market rules, and customer expectations. One size rarely fits all, but best practice, advanced technology applications, and the expertise and tools to deploy them is what brings customers to Silicon Valley in search of solutions.
It is still true that retaining customers and expanding wallet share of their services spend is a lot easier and much more cost effective than signing up new customers. But recurring revenue strategies lend themselves well to organic growth if you can deliver high quality results, consistently, and competitively to keep customers happy.
The growth challenge for cleantech and information services companies is to focus on the pain points and business needs for your customers and build solutions that work in the “sweet spots” across more than one global market or alternative business future.
Here are several observations to consider:
- Apple versus Microsoft Dilemma. One of the great rivalries of high tech is this competition between the MSFT business model of dominance and ubiquity versus the Apple business model of style, ecosystem control and premium pricing. For years Microsoft beat Apple handily, saw market share growth, realized dominance and became ubiquitous for operating systems and productivity software. Recently, AAPL market cap beat MSFT for the first time. Why? Because MSFT became complacent and despite its growth and capabilities it failed to imagine a different future and thus is playing catch up for fear of being left behind in mobile computing, in ecosystem growth of Apps, and now risks Windows and Office software being lost in the cloud.
- Public Cellular Networks versus Private Networks for Smart Grid Dilemma. While the largest network players in the smart grid space are focused on building mesh networks to enable smart meters and meter data management, public cellular systems are becoming cost effective alternatives. Utilities wanted private networks because of concerns about cost, coverage, bandwidth, security and ratebase treatment. But these historic objections are being overcome by much lower cost by telecom interest in revenue growth from expanded use of their networks for smart grid. The last remaining hurdle is regulatory treatment that overcomes the suboptimal choice for utilities by building private networks instead of leveraging public networks because they can earn a return on network investment but cannot recover the operating cost of telecom services. If these telecoms can repurpose their cellular networks they can use that same recurring revenue model to take market share and be part of a fast growing new energy future.
The strategy challenge is get close—very close to your customer’s fears and aspirations about the business future offering a trusted adviser relationship and useful recurring revenue apps and services to walk side by side.
SMART GRID OPPORTUNITIES FOR RECURRING REVENUE
Living into the smart utility promise in energy or water is more than smart meters, more than data management, more than networks—it requires transmission lines, renewable energy power plants and other infrastructure and operating systems to assure reliability, integrate across distant markets and blend supply-side and demand-side options into an integrated resource plan compliant with regulations. Creating a smarter, greener, more efficient planet requires more than outsourcing IT —it also requires world scale, world class infrastructure savvy, regulatory and operational expertise, power and water engineering and construction experience seamlessly integrated, optimized, operated and maintained.
You see where this is going don’t you?
The smart grid space has been all about smart meters. But meters alone are not sufficient to deliver the promise of smart grid. For cleantech companies focused on building networks, sensors, gadgets and software for smart grid being good at individual core competencies may not be sufficient for scalable growth unless you put them together to build a ‘better mousetrap’. And that is a big problem for clean tech start-ups—good products alone don’t make for a complete solution. So consolidation is driving good product companies into the arms of better solution companies.
The utility business has traditionally be a very fragmented in both operations, regulations and service types. Smart grid changes that and clean energy technology must be scalable across many markets to deliver the many unit needed to bring costs down to grid parity so renewable energy and smart grid applications are sustainable without subsidies. That is exactly the same problem that cleantech players face in building the unit volume for their smart grid apps and solutions to make them profitable. Fragmented utility markets and transmission grids are bottlenecks not easily overcome.
Many competitors in the cleantech space may be as good as or better at networks, business process analysis or data management. But in the smart grid space few of these technology players have the deep energy domain knowledge to be trusted advisers on the smart grid path to the future.
A scalable growth strategy for smart grid builds upon the core competency of engineering and building new information technology to deliver the promise of smart grid for two way communication between customers and suppliers, operation and performance to deliver infrastructure results PLUS the applications, solutions and services expertise to optimize their performance, adapt to change and deliver those results consistently, efficiently, cost effectively, prudently, responsibly in real time, every time!
Adding a recurring revenue strategy to monetize intellectual property, core competencies, best practices, capabilities and experience is the functional equivalent of creating the Apple iTunes or Apps Store for the engineering and consulting business. Building a recurring revenue business line to deliver standardized best practice solutions to serve your own business needs and support your own employees working around the world will improve the quality and consistency of work products. Using those standard best practice products relentlessly thousands of times each year will perfect them and make them better. Packaging and offering those solutions and the value-added services they leverage in consulting, operations and technology to partners and customers completes the circle to scalable growth from recurring revenue sources.
The installation of a large fleet of smart meters marks the beginning of the end of the first phase of the smart grid revolution. But it is only the beginning of an even bigger phase of integrated scalable growth of applications for home area networks (HAN), demand response and virtual power plants, distribution and grid automation and the effective integration of all the renewable energy supplies into a digital grid infrastructure in the second phase.
But that is not the maturity of smart grid–phase three will be the optimization stage where enough infrastructure is built, enough smart meters are installed, enough interoperability is enabled by open standards to make much of the smart grid appliances and systems work together. Then the fun begins!
The logical outcome of a smart grid enabled world is the breakdown of the old central station generation-based utility business model in favor of a more distributed generation business model that enables head to head competition between supply options and demand options leveraging business intelligence from smart meter usage to create a wide range of energy services products combined with entertainment, security, information, communications and online access services for a digital shopping center of choices for products and services all likely using recurring revenue business models to reduce churn, build scale and profitability and bundle products into solutions tailored for scores of residential, commercial and industrial categories of users.
WHY USE RECURRING REVENUE STRATEGIES?
- Recurring revenue improves the quality of earnings and thus overall business valuation. Unlike billable hours business model where revenue must be re-earned each month, recurring revenue is a predictable revenue stream from the advanced sale of a data or software license, advisory fees for access to standard analytics products sold on annual contracts, or multi-year outsourced service contracts. Because the revenue is contracted to recur each month without the sales expense and uncertainty of billable hours projects, recurring revenue improves the quality of earning and overall business valuation.
- Recurring Revenue provides revenue stability. Because recurring revenue contracts are annual or multi-year deals the revenue they produce smooths the peaks and valleys and offers stability for the business in recessions or between big billable hour projects.
- Recurring revenue products monetize R&D investment that otherwise would be overhead. By creating a market for research and development outputs, recurring revenue products self fund or pre-fund R&D and free working capital for major investments turning overhead into a profit center.
- Recurring revenue products have higher margins and improve EBITDA. Because recurring revenue products are ‘produced once, used often and sold many times’ they tend to have higher margins on par with data and software products. Standardized work scopes and methods allow products to be produced with lower cost, junior staff under supervision to improve EBITDA and speed training.
- Recurring revenue products improve consulting productivity and quality. By providing a high quality starting point for repeatable consulting services, recurring revenue products let consultants start work on billable hour tasks faster than competitors, improve productivity by using lower cost junior staff for standardized simulation analysis and improve the quality and consistent of consulting work by leveraging best practices.
ALIGNING THE BUSINESS FOR SCALABLE GROWTH
Applying a recurring revenue strategy to realize the organic growth potential of the firm is the first essential step in creating a virtuous circle that aligns your business interests with those of your customers. The internal business results from such a strategy drive improvements in EBITA and performance by:
- Aligning units around a common growth strategy, common, modular product components;
- Refine best practices with customer engagements to align your interests and customer interests,
- Leverage core competencies and capabilities to create recurring revenue streams;
- Reduces lead time for projects to start work using speed to competitive advantage;
- Shifts expertise to customer facing roles focused on business solutions and enables use of lower cost junior staff to build product modules and maintain them;
- Repeated use of product modules optimizes performance and integration of infrastructure, information, innovative technology, and integrated services into more complete solutions to address customer needs across global markets.
Recurring revenue strategies value the firm’s core competencies by monetizing them, using them relentless inside to improve performance results and EBITDA, and demonstrate powerfully to clients that your company’s solution is the logical choice to achieve their own scalable growth goals.