Subscriptions & Equity: The Modern VAR's Essentials
By Robert Cooper, Wildix
For the successful systems integrator, growth and subscription selling must go hand-in-hand.
More and more for end users, subscriptions are taking over. In a 2020 report, Gartner forecast the year-over-year growth of the worldwide XaaS market to increase by $49 billion in 2021; in 2022, growth is expected to accelerate, putting the market total at a whopping $364 billion. And listening to those end users, one quickly understands where these skyrocketing numbers are coming from. With the ongoing cloud and smart working revolution, businesses today want to take advantage of the latest and greatest in advanced technologies, as well as reap the major benefits of those innovations. What's more, they want to have those advantages while enjoying flexibility and an agile reaction to the market—which equates to shaking off the commitment of investing in ownership of technology and instead moving to the subscription model.
There's a vital principle at play behind the model to understand: those end users that buy into the subscription model are those that outpace, outlast, and outsell the competition. They understand that they're building a company that will outgrow their present conditions and are adopting a model that will not only keep up with their growth but facilitate it.
This is a principle that many VARs and MSPs haven't adopted — but will need to if they want to remain in the market. Considering and actively planning for business growth is, of course, at the heart of success for any business that wants to do more than make some easy money over a few years (which is fine, so long as that's what you're aiming for). To achieve that growth within the UCC space, VARs need to do far more than rely on the quick fix of one-off sales. They need to think exactly how those innovative end users are thinking: that subscriptions are the key to achieving that growth.
The reason behind this is likewise one that end users investing in technology subscriptions understand, namely that the model is crucial for business valuation. Achieving higher equity and overall business value is what determines growth; it's one thing to just have more employees or higher quarterly sales goals, but what matters in the market is the actual numbers a business brings in. And on the sales end as well as the buying end, subscriptions play a pivotal role in increasing valuation. As UCC analysts have described in depth, traditional one-off sales have lost their value in the market, due to both diminishing consumer interest and larger brands rendering them obsolete. The truth is the dominance of subscription sales is no longer some far-off future to prepare for — it's the reality for the VAR and their customers now.
However, there's more benefit in the subscription model than just the fact that it's overtaken the previous model. What's more, important is that selling subscriptions is just about the best way of building equity that a VAR could ask for.
Fundamental to valuation is that it's built not so much from the cash flow a business has achieved up to the present moment, but how much cash flow it takes in regularly, and how much that influx will reliably grow in the future. Because the subscription model gives a VAR a regular intake of monthly subscription fees, it fulfills these requirements in one elegant fell swoop; the per-month profits it brings in demonstrate ongoing profitability for a business, and even show continual growth by tracking increases in subscription orders.
What's important to note here is that the monthly recurring revenue (MRR) the subscription model brings in is the foundation of Customer lifetime value (CLV), i.e., the overall that a given customer base can produce over years. A one-off sale is just that: one time only, without a guarantee of future value. But a recurring subscription, and the MRR it brings, is a value that lasts. The fact of the matter is, businesses that use a recurring revenue model are worth 16 times more than those with a one-time revenue model, meaning they have higher business valuations.
One of the foremost reasons behind this compounding revenue is how the subscription model allows the VAR to work more closely with the customer. While the standard model of one-off sales didn't give much room at all for customer interaction beyond sales pitches and support requests, the subscription model means you have room for constant updates and touch-bases with your customer, ensuring they know exactly what value you're providing them with regularly
Really, regular customer interaction is more than just an additional benefit of the subscription model; it's a fundamental aspect of why it's key to building equity at all. 100% of the business value you establish comes directly from your customer base — every penny of profit and every percentage point of growth you earn is only possible through the people you connect with. It should go without saying, then, that there's a veritable gold mine in store if you do more for your customers more often, rolling out continual updates and fixes all while consulting with them on how to best address their own needs for growth.
This leads to the point of how the subscription model is neatly suited to enabling end user growth as well. The subscription model isn't something that benefits the seller at the customer's expense — as I said, it's a business model that end users are increasingly asking for, as it brings them substantial benefits as well. Instead of having no choice but to invest in high-end hardware and software that is likely to face quick obsolescence, they can instead opt for flexibility, a model that ensures their digital infrastructure will be outfitted with the latest the market has to offer for no additional up-front costs. Adding or removing devices in accordance with changes in staff size changes is just as easily achieved since instead of that up-front investment restructuring can be accommodated only through changes to the subscription.
Your growth depends on enabling your customer base to keep up with market changes, and it's only going to be that growth that ensures your business has a future. And if you're not achieving growth, it leaves room open in your market for competition to make up that lost ground instead. But this forward momentum can only be gained by enabling customer growth; they need to begin seeing their equity rise to see value in contributing to your increase in equity.
Fortunately, the subscription model has given the VAR their easiest path toward growth yet. Right now, this turning point toward your success is practically right in front of you, waiting to be picked up by any systems integrators smart enough to seize the opportunity.
The only question is whether the one taking it will be you, giving you growth of your own, or a competitor, taking you out of the market sooner or later (and likely sooner) down the line.