Monthly Recurring Revenue on fixed term contracts is the godsend of predictability and high valuation for any type of service business. Even better is Monthly Recurring Revenue that is “Sticky”.
Sticky revenue is generally tied to charges for services that would be difficult for a customer to change, replace or cancel. For a service provider the revenue practically becomes an annuity they can count on. Sticky revenue ultimately leads to overall low contract churn rates even when the provider isn’t providing quality technical service or a good customer experience. Ultimately, Sticky Revenue is an enormous benefit to technology vendors but can become a nightmare for customers who don’t have a Plan B for their IT.
Six Tips to Avoid Being a Sticky Revenue Victim
- Recognize your position early: Before entering into a fixed term contract understand how difficult it would be to make a change when that term expires. It’s critical to understand the overall cost, level of internal effort and timeline would be to execute a change.
- Understand the rules of contract changes and additions: For example, not being able to add services coterminous to the initial services can create a real issue when the initial services are up for renewal especially if those services are functionally tied to each other. This is an item that needs to be reviewed and clearly understood before the initial contract is signed.
- Don’t Count on the Sticky Revenue Vendor to help you: Even the most honest of vendors is not going to put a red flashing light on their sticky revenue and warn their customers they could be getting much better rates. Taking care of their business is what they do all day, every day. Good ones (ones you would want to invest in) know exactly what their profit margin is for every single customer at any given moment. They have no interest in reducing that profit margin for themselves or their investors so it is incumbent upon You the customer to be prepared.
- Start Early in Negotiations: Starting a negotiation late or too close to a renewal date is probably the most common blunder made by customers. Never underestimate the intelligence of your vendors. They know if a customer is prepared to make changes or not. Showing a vendor that you are ready, willing and able to make a change levels the playing field in a negotiation.
- Stay in tune with the current market: This is easier said than done as most IT departments don’t have the internal resources, experience or expertise in all the services that would be applicable to sticky revenue. It is absolutely critical to know if market rates are going up or down for any given service. Typically in IT most services go down in price per unit as competition and efficiency increase. Also understanding the benefits of new service models or pricing models that emerge can be of high value which can create a competitive advantage in service delivery for organizations deriving direct revenue from their IT.
- Embrace Vendor Neutral Expertise: There are a growing number of provider neutral advisory firms like Kiamesha Global that have hands on experience within the various sectors of the IT service provider community. Leveraging this expertise can be of enormous benefit to organizations that do not have the time to concentrate on constant market movements or to field an abundance of calls from direct sales representatives. Whether looking at new services or evaluating existing contracts, vendor neutral expertise can indeed help to keep you from being a Sticky Revenue Victim.
About the Authors:
Todd Smith and Kevin Knight are the principals of the data center marketplace advisory firm Kiamesha Global LLC (www.kiameshaglobal.com).
If your organization is considering the potential benefits of a data center relocation, expansion or simply want to better understand your current situation and options around data center build, colocation, cloud, wide area network or data migration services in the data center marketplace, Todd and Kevin can be contacted via e-mail at firstname.lastname@example.org and email@example.com.