ORLANDO – Best-selling author John Warrillow told a quick story about two brothers who ran a business selling elevators for high-end hotels. But when the financial crisis of the early 1990s struck, the brothers were forced to lay off their workforce.
“They said, ‘This is crazy. We have to get out of this business,’” Warrillow said during Tuesday’s MAX 2014 U.S. Customer Conference keynote at the Renaissance Orlando at SeaWorld. “So they looked at their model. It’s sexy to install elevators for Donald Trump. But nobody wants to service them.”
Warrillow’s story illustrated the challenge today’s managed service providers (MSPs) face: Finding a way to generate recurring revenue with their customers.
“The more subscription-based revenue you have, the more valuable your company. It also helps you smooth out demand,” said Warrillow, author of best-seller “Built to Sell” and founder of the The Sellability Score, a cloud-based assessment tool businesses use to assess the “sellability” of their company.
“You underestimate the number of people you need, and customers get angry,” he added. “The opposite is worse: They’re locked in their office, updating their LinkedIn profile.”
Warrillow, whose new book is on the subscription economy, discussed three subscription-based models:
The simplifier model – Your customers don’t want to worry about specific IT jobs? You can be the proactive virtual CIO. You handle those tasks, enabling them to focus attention elsewhere.
The front-of-line model – Here, you bundle services and ask customers to pay on a subscription basis.
“We are living in a society willing to exchange money for time,” Warrillow said. “Because people subscribe, it changes their behavior. It makes them more loyal to you.”
The peace of mind model – Customers want to feel safe. They want to know what’s most valuable to them is always protected.
The example Warrillow used to illustrate this model is a dog-tag service that notifies the owner via text message when the family pet roams outside of acceptable boundaries such as the back yard.
“You hope (as a customer) that the provider never has to do anything,” he said. “But it’s nice to know they’re there if needed.”
Warrillow also introduced attendees to a “subscription dashboard.” It’s a mathematical equation that determines a customer’s lifetime value (LTV). This key metric tells how your company is performing as a subscription operator relative to other companies.
The equation: Multiply the monthly recurring revenue (MRR) of a customer by the margin you have for your customer base. Divide that number by the churn rate in your customer base.
“If your LTV to CAC (cost to acquire an average customer) is better than three-to-one, that’s the time to invest in your business,” said Warrillow, pointing to sales and marketing. “If you’re below three, it’s time to put on the breaks and say, ‘What are we doing?’”
Warrillow also stressed that the on-boarding period is top priority.
“If you find a way to nail that first 60 days, the statistical likelihood that they will stay on as a customer of yours is through the roof,” he said.