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Season 2, Episode 13 – Building a Recurring Monthly Revenue Business in AV
For a few years now, “you need to get recurring revenue” has been a major drumbeat in AV industry conversations. But besides “get money every month,” what does this mean? What makes it good for your integration business? And what changes do you need to make to take advantage of the shift? Our guest Commercial Integrator’s Dan Ferrisi will discuss these points – and how the trend can benefit end users as well as integrators.
Dan Ferrisi, Editor in Chief, Commercial Integrator
Dan Ferrisi heads up the editorial team that produces Commercial Integrator, a multi-platform editorial property that serves as the business handbook for commercial AV integration professionals. Dan has been part of the AV industry since 2004, and he reports on and writes about ways that integrators can make their businesses more profitable and more effective.
Justin Kennington: 00:09
Hello and welcome everybody to SDVoE LIVE! I am your host, Justin Kennington and this is TV for pro AV. I’m excited about today’s show. Our guest is going to be Dan Ferrisi. He’s the editor in chief of Commercial Integrator Magazine. When I called up Dan and he agreed to be on this show, which was wonderful. I said, “Dan, what do you want to talk about? Your job is to be out there in pro AV talking to people about what’s on their mind, and what’s important, and what’s not important. And so, what is it? What should we talk about?” And he shared with me that Commercial Integrator the magazine’s focus is on the business side of AV integration. It makes sense commercial, integrator. It’s how they came up with the name, I guess. We’ll ask him about that.
He said that Recurring Monthly Revenue is a major hot topic. And I knew that, because I hear about it all the time. I don’t personally live in the world of integration. So, I don’t have Recurring Monthly Revenue in that sense, but I wanted to dig in with Dan about what does that really mean? Why is that important? How do we get it? Because I think we’d all love to have an income stream that just pays us money every month. Wouldn’t that be great? But how do we get it? And that’s what we’re going to talk about with Dan. So, sit tight because the interview is coming up in just a few minutes. I also want to remind you that today we will have our aftershow. So, after the show is over, that’s how we came up with the name for that.
Make sure you sit right where you are, let the credits roll and put your feet up, relax, and you’re going to get your chance to ask questions to Dan, to myself, to my co-host Matt by sending us questions to firstname.lastname@example.org. Just drop an email to that address, or if you’re with us on the SDVoE Academy or you’re with us on the lAVnch platform, look down below my feet down there. You’ll find a chat box where you can interact with your fellow audience members during the show, but you can also get your questions to us. We’ve got moderators in the chat there, who will make sure that Matt and I, have your questions ready to give to Dan for the aftershow. So, make sure you get those in there. With that, I say, let’s get on with the show. I’m going to send you guys to your first quiz question of the day. Let’s have a look. All right. Anybody know the answer to that one? I don’t know. Let’s get Matt in here. Matt, you’re in the hotline central. Are you with us? This is United States calling, are we reaching?
Matt Dodd: 02:54
Here I am. How are you?
Justin Kennington: 02:57
Good. I’m having a blast over here. I’m excited to talk to Dan and I hope our audience is too. So, let’s make sure those questions are coming in. How’s it looking over there, Matt?
Matt Dodd: 03:07
Absolutely, it’s looking really good. You can tell there’s lots and lots going on behind me. Really looking forward to this show because this was always a bug bear when I was an integrator. How are we doing mate? How do we get the recurring revenue model going? As our team of moderators, you can hear in the background, taking your calls, answering your emails and Dan’s here with Justin to talk about that exact thing, recurring revenue in AV. So, get your comments and your questions in email@example.com or you can use the chat right here in the academy. So, give us your feedback on the show. Give us you feedback on everything. We want to hear from you. As always, we have a question in from Sheila, from Ontario, Canada. All the way from Ontario says, “I’ve heard a lot about service contracts as recurring revenue, but what other structures of recurring revenue are out there?” Really good question there because there are others. Love it. It’s going to be very exciting.
Justin Kennington: 03:58
I’ll put it to Dan and we’ll find out. Well, why don’t you head on out of the hotline central and join me here on the stage. And we’ll take a look at some news.
Matt Dodd: 04:05
Will do. (Silence.) Never gets easier. Those stairs. They never get easier, but hey, when you get into this age, it’s good to keep in shape. How are you, sir? You look well.
Justin Kennington: 04:48
Good. Thank you. It’s nice to be here. Nice to see you. I understand you’ve had a lot of driving this weekend. I hope it all went smoothly for you.
Matt Dodd: 04:55
Yeah, we got there in the end. A little mini’s, not really designed to do huge long distances with six foot three geisers driving them but hey, do you know what? Every day is a school day. Shall we do some news? So, the first topic of news we’ve got coming up today, cracking, If I can read, I have a little service over here, if you don’t mind. Is that how you say? Hey little service over here, it’d be great. I’m practicing my American accent. So, when I’m over to see you guys, I can fit in.
All about service and monitoring. And for me, it’s got a nice sort of balance between the recognition that commercial AV integrators are already taking the service model. They’ve got service departments. They’ve got service techs and they’ve already been taking this seriously for quite some time. But now as we’re shifting forward and as you see, we’ll talk about in the second news section, it’s kind of going from a, hey, this is a great thing to have to pretty much having, it’s got to be in your business. And residential AV integrator often find this quite tricky. As you know Justin, I was a residential integrator many moons ago when this head was full of hair. And it was hard work where you had your own integration technicians, but then having a service tech was actually quite a different discipline to have. And it was hard to try and pick that kind of business up, even though you knew that it was integral to not just the flow of money coming in, but also the value of the business. What was would you take here?
Justin Kennington: 06:35
I’m curious, did you have of a dedicated service tech or service department in that business those years ago?
Matt Dodd: 06:40
No, not dedicated, but we had two guys who kind of, they looked after it, if you will. They were integrators…
Justin Kennington: 06:47
Matt Dodd: 06:47
… First time round, but then they were the guys that looked after all of the remote management systems in logging in and checking with the clients and make sure that… We used to do it a little bit like you would service a car. So, the client would have a log book and they would say, “You pay for us to keep coming back and looking after your system just like you would with your car. And your system will keep running smoothly.” And that was our idea and it worked pretty well, but I’m really looking forward to hearing what Dan’s got to say.
Justin Kennington: 07:16
That was I think just the challenges this article talked about. He didn’t come out and say it. He talked about how the average residential AV integrator is a quite small business. Probably, less than a dozen people on average. What he didn’t say is that I think the average commercial AV business is much larger than that. Especially, these days because of the big mergers and acquisitions going on there. And I think it really is this. There’s a certain size where there’s a tipping point that you have enough recurring service revenue. You have enough recurring service issues that it makes sense that you can make service a full-time job for someone. Instead of, as you say well, I’ve got an integrator and he has to take the service calls when they come in. That’s a challenge you have to live with at a certain small size.
Matt Dodd: 08:00
It is. And you had to do it. Sorry guys, got to just leave you to it just for a second. I’ve got to go and ring Mrs. Meagan she’s got a problem with X, Y, Z, but then that was the all-important part about making sure that we were getting in there first. Hey, your service is due for book it in for next month or whatever it might be. And it also gave us a little bit of power back again, when, if a client, which they invariably do. You’ll have seen this guy, when they have clients saying, “Nothing works nothing’s ever worked.” And all that usual that they send you, but you say, “Well, hold on a minute. Let me just check in here. You haven’t let us come back to service it for well over a year or well over so many months. Did you treat your Austin Martin] on the driveway this same way, Mr. Client. Did you not bother with that either?”
And once the simile was made between, okay, this is what you do with your car. This is what you do with your home entertainment system you’ve spent a lot of money on. Once that penny dropped, then it became a lot easier to communicate the importance of maintenance and aftercare as we called it back then. Should we move into our second news topic? Moving on-
Justin Kennington: 09:10
And there you are interacting with that client, apologies, giving them a good experience. And that’s the perfect segue to this second article.
Matt Dodd: 09:20
… it is.
Justin Kennington: 09:21
A taken care of client is a happy client.
Matt Dodd: 09:25
Yes, hopefully. Yes. This to me is by taking on the managed services element the offering that for client retention. Again, I’m looking forward to hearing Dan’s pro take on this, but for me do my clients need retaining? Do I need that retention element putting in because I’m going to lose them possibly? And while you think the answer may be, yes, it’s not a sure thing to suddenly just say, hey, we’re going to do some maintenance after to care. We’re just going to charge the customer’s X amount of money and make sure that then certain things are covered. There’s a lot of planning really does need to go in to creating like a maintenance and aftercare package in your business. So, today’s going to be really helpful for those of you that aren’t really doing it or not sure if you’re doing it the right way. Today, is going to be a really useful stepping stone to hear what Dan’s got to say. Because once you get it right,
there are certain products that you install that don’t go wrong very often. And it’s those products that we can begin to really include as part of the general every day recurring revenue. These things aren’t going to go wrong for very often. So, if you are paying us a monthly fee to make sure that we cover them, if they do go wrong, then we’re covered, which bits? Are you going to include a TV that’s on a wall. So, if that ever went down Christmas day, we turn out and replace it for you. Is that included? Can we cover it? Can we do it? So, there’s a lot to think about. Sorry I’m going on here, but this is a great topic for me. A really good topic.
Justin Kennington: 10:57
Near and dear to your heart?
Matt Dodd: 10:58
Justin Kennington: 10:59
I think any successful business realizes without panicking, but realizes that they’re always at risk of losing that client to someone else. And if your only model is to install the big system, collect the check, and then call back in two or three years wondering if they want something new. If instead you have a contract and a recurring business relationship, then you know who else are they going to turn to?
Matt Dodd: 11:26
Justin Kennington: 11:27
When it’s time for an upgrade. When it’s time to expand to their new office. You’re going to be that first phone call. And I think that’s another strong reason besides keeping your own business in order, keeping your client list in order, keeping them happy, and keeping the install side of your business growing.
Matt Dodd: 11:42
Well, I’m going to jump out now. Get back into hotline central. So, I’m going to leave you with them. Have fun and I’ll see you in a bit.
Justin Kennington: 11:50
Thank you, Matt. As I mentioned, our guest is the editor in chief of Commercial Integrator Magazine. We’re very pleased to have him with us today. Dan Ferrisi, why don’t you come on in. Dan, are you there?
Dan Ferrisi: 12:02
I am here. Thank you so much, Justin for having me. I really appreciate it.
Justin Kennington: 12:07
Well, thanks for joining us. This is a great topic and I hope our audience finds it as useful and interesting as I do. So, why don’t we start with the very basics. And this might even seem like a silly question, but I want to hear your answer. What is recurring revenue?
Dan Ferrisi: 12:24
So, it’s definitely not a silly question. Commercial Integrator exists to be a business handbook for those in the commercial integration industry. And if integrators are trying to make their business better, there’s no such thing as a silly question. It’s just about trying to find those strategies. And some of them are really kind of outside of the box, and they require some thought, and they require some planning. What is recurring revenue? It’s a regular cadence of income, whether it’s a monthly cadence, a quarterly cadence, annual. The idea of having a regular flow of income. It tends obviously to help with integrator’s cash flow. It lends predictability to an integrator’s books so you don’t have these big infusions of cash with one capital project. And then there could be a drought, or a backup, or something. And then you can run into cash flow issues. So, it’s kind of a shift from that capital expenditure CAPEX model to an operational expend or OPEX model. So, just drifting away again from those one-time project-based cash infusions to a predictable regular cadence where you can build your cash flow and your books around it.
Justin Kennington: 13:28
Yeah. I was going to ask what’s so important about recurring revenue. You just talked about this cash flow and sort of the bookkeeping element of it, which makes total sense to me. What are some of the other reasons that a recurring revenue model is important and valuable?
Dan Ferrisi: 13:45
I think one of the most important reasons other than those cash-flow issues, centers on just having strong relationships with your clients. I think everyone in the integration industry would probably agree that it’s much easier once you have a client to retain them and do project after project or service after service with them than doing a project, closing it out and then trying to find an entirely new prospect. So, I think one of the real benefits of RMR is also just the stickiness aspect.
It’s going to keep you in front of that client day after day, week after week, month after month, if they have other projects or other services that they need, you are going to immediately come to mind and you may not have to have any kind of a bid situation or a competitive situation, because if you’ve serviced them as well as you potentially could, they might just say, I want to work with your firm, period. And then it’s right in your hand, you don’t have to compete. You don’t have to bid, you don’t have to deal with a consultant and try to win the bid.
Justin Kennington: 14:44
There’s a trust there and you’re top of mind, I’ve got a buddy in sales who likes to say, I know that if I’m talking to my customer, somebody else isn’t talking to my customer.
Dan Ferrisi: 14:55
It’s a very good point.
Justin Kennington: 15:00
Let’s talk about the question we got from our audience already. Matt and I, covered in some of the new sections, the importance of service contracts. To me, that’s a pretty obvious model to get recurring revenues. Let’s set up some sort of service agreement, you’ll pay me $X a month. I’ll make sure everything is running smoothly and perfectly. What other kinds of model for recurring revenue are there?
Dan Ferrisi: 15:22
So, there are a bunch of different models. I do want to at least touch briefly on service contracts though, because they tend to have a lot of different permutations. It could be as simple as break/fix and that’s obviously not going to produce a whole lot of RMR. It could be as complex and ambitious as something like 24/7 monitoring and remote support with guarantees of negligible or zero downtime. So, imagine you have a venue that’s holding like a super bowl event or something like that. You could have a contract or a service agreement where there’s an assurance that someone is going to get off their couch, step away from the TV on that Sunday evening, and they’re going to remote in right then and there, and fix the problem so that your super bowl event goes off without a hitch. That’s obviously a whole lot more complex and you’re going to pay more for it than something as simple as break/fix.
Then there’s the other idea of AV as a subscription. So, something akin to Netflix, something akin to Apple music, HBO Max, Microsoft Office these days. The thrust of that is you talk about a conference room or a classroom for example. It’s not getting the AV equipment with the purpose of owning it. It’s getting the AV equipment with the purpose of using it and only using it just like you don’t own Microsoft Office anymore. You just use it. So, you would pay monthly, or quarterly, or yearly to use the gear. And it’s kind of taking the whole concept of ownership out of the equation. And there are companies like TAMCO and I’m not affiliated with them. I’m just mentioning them because I happen to have heard a presentation recently, where they kind of finance that initial gear outlay, and that’s one path of doing things.
They get their money obviously by financing outweigh and then they make money on the interest and all of that. But they work with integrators and then the integrator gets a cut of that monthly money for integrating the system, and then servicing, and maintaining the system. So, it could be like a 60-month contract and TAMCO gets its money and the integrator gets its money in that regular or monthly cadence for integrating, and for monitoring and maintaining the system. So, that’s another way of doing it. It’s AV as a subscription.
Justin Kennington: 17:25
Yeah. So, certainly, I’ve heard this AV as a service, AV as a subscription concept before. That seems to me like as far as we can go, at that point we’ve sort of virtualized the whole thing. I think Volvo does this with some cars now. It’s not even a lease, it’s a subscription. You pay 600 bucks a month, you get a Volvo XC40 or something for two years and then you just give it back at the end. Is that as far as we can go? Is there any other crazy model out there? I don’t think so, just exploring the space a little.
Dan Ferrisi: 17:59
I think given the relative hesitance of some people to approach anything other than a capital expenditure. I think that’s probably as far as we can go right now, because when I was listening to that presentation, there was a lot of interest. There was a lot of engagement, but there was also a lot of skepticism. So, I think just that model itself, the Microsoft Office model is revolutionary enough and surprising enough to a lot of people that, that’s probably as far as we can go in the immediate term. But obviously, there’s a lot of work to do to embrace even something like that. We’re not anywhere close to it at this point.
Justin Kennington: 18:40
I was setting up to ask, do you think we can get to a world of entirely subscription based AV? I think you just told me not right now. So, let me ask this, what needs to happen? Or what could happen? Or tell me it’s impossible to get to a world sometime down the road where practically all let’s say commercial AV, because I’m going to imagine that residential AV is going to be very different. But let’s say that all commercial AV is buy a service. Do you think we can approach that world? And if so, what would need to happen?
Dan Ferrisi: 19:14
I think we may be able to approach that world. But I really don’t think we’re ever going to be entirely subscription based or AV as a service based. And I don’t say any of this pejoratively, but I mean there’s still people who subscribe to print newspapers and they’re not going to read their news online. There’s still people who watch DVDs and they’re not going to necessarily stream their content. It’s just to say that some people like to stick to establish ways. And there are integrators right now, many of them who are making millions and millions of dollars in revenue doing capital projects. And it’s going to be hard to convince them, to tear up a model that for years and decades has worked for them and shift entirely to something new. But I do think it’s doable to move from 4% or 5% services or 4% or 5% subscription in terms of revenue to something approaching 25%.
I think that’s doable. And one of the reasons, the impetus I think for doing that is just the margin aspect. Commercial Integrators does studies with integrators every year, our state of the industry study. And you hear about integrators making maybe 12% margin on capital projects on the hardware at least, on 15% margins for hardware 16%. When I talk to my friend, Tom LeBlanc and Chuck Wilson at NSCA, they say, they think overhead for a lot of integrators is in the mid to high 20%. So, if your hardware margins are below your overhead, that is problematic. And yes, you can make it up in labor, you can make it up in other things. But the idea is if you’re a capital expenditure-based integrator and your margins on hardware are so small relative to what your overhead is, that should, I think, give you a reason to say there has to be a better way of doing this because otherwise you’re just clawing for every dime and every nickel.
Justin Kennington: 21:02
Yeah, that’s amazing. And I’m thinking what that’s really going to do is clamp down on your ability to have inventory. And here we are in a supply-chain-constrained world where inventory can be a massive advantage. That’s a very difficult trade off to make. Do I want inventory that’s costing me this much money? Or do I not? But then can I get it? Ooh, that’s a whole other discussion. You mentioned figures like 4% or 5%, is that approximately how much of, let’s say integrator revenue is recurring these days? Paint a picture of what percentage is recurring right now.
Dan Ferrisi: 21:39
To some extent and this is no surprise. It depends on the integrator to whom you speak. There’s some who have much better built out RMR kind of operations than others do, but it seems like most of those to whom I speak are in the single digits. But that isn’t to indicate that they aren’t growing rapidly. Commercial Integrator’s integrator of the year logic integration, I was talking to Sean Hansen earlier this year and he said that they are relatively low in terms of services, but they doubled this most recent year. And they’re intending to double every year for the foreseeable future. So, whether it’s from three to six to 12, whatever the case is, there’s a trajectory of moving in that direction. And some forward-thinking integrators are really moving in that direction quite rapidly. And I was just speaking to Frank McCann of McCann Systems a few days ago.
And he was talking about the extent to which they’ve invested in services. And although, they don’t do a whole lot of the AV as a subscription kind of model where it’s a lease or something like that. They said 99% of their projects have some kind of service associated with them. Now, it could be again, as simple as break/fix. So, it’s not necessarily that 24/7 thing, but 99% of McCann Systems’ clients have some kind of a continuing relationship with them. So, it really, I guess, it depends if you’re trying to quantify it, how you’re defining services. Is it a subscription? I think it’s going to be a pretty small percentage right now. Is it services of some sort? Including break/fix, it could be much larger. And the really built out most successful firms have gotten quite high in terms of building that into their day-to-day operations.
Justin Kennington: 23:20
Yeah. Okay. That makes sense. How widely adopted is AV as a service these days? Is that something that is truly rolled out in places? And then the follow up is, is there a pattern? Is it some particular vertical for example, that has latched onto AV as a service or is it still so new that we don’t know where it’s going?
Dan Ferrisi: 23:45
I wouldn’t say that it’s necessarily so new that we don’t know where it’s going, but I think that you’re seeing different permutations of it in different areas. Certainly, when you’re thinking about corporate entities, and schools, education venues, things of that nature, which of course are kind of the backbone in a lot of respects of the Commercial Integration market.
I don’t have data in front of me, but when you think about integrators that specialize in the commercial space, you would imagine a lot of what they do is enterprise. A lot of what they do is corporate. A lot of what they do is education. And a lot of those clients have very little tolerance for downtime, very little tolerance for saying, “oh we have to close down the classroom, we have to close down that venue, or the conference room isn’t available today despite the fact that we have an important client coming in and we have an essential meeting to hold.”
I think when there is a very low tolerance for failure and a very high sense of mission-critical necessity of excellence. That’s somewhere where AV as a service is going to be more valuable. And again, it may not be the permutation of AV as a subscription. But if there is zero tolerance for failure and zero tolerance for downtime, then it’s going to be a whole lot more persuasive if I, as an integration company, come in and say, “I’m going to remote in within 30 minutes of a call. I’m not going to have to roll a truck. I’m not going to say I’ll fix it on Thursday. I can have someone remote in. This is their cell phone number and they will be available to you or one of their colleagues will be available to you immediately to make sure that, that class goes off without a hitch. That meeting goes off without a hitch and you don’t have to send the students home or send that executive home without having had the conversation.”
Justin Kennington: 25:24
Yeah. That makes sense. And maybe that speaks to just how broadly this might be successful. I’m thinking back, we had a guest on a few episodes ago. I can’t remember who or what, but basically they said something like, “Everyone thinks their own business is mission critical.” So, maybe taking advantage of that with AV as a service and the reliability it brings works out. Dan, sit tight, we’re going to cut to wrap up the show, but I want you to stick around for the after show. We’ve already got some questions coming in from the audience here. Keep those coming everybody. And we’ll see you in just a couple of minutes. Dan, meanwhile, you guys head over for a fact check.
Matt Dodd: 26:17
Great interview there, Justin. Fantastic. Thank you for your questions so far. Don’t forget to check out the resource panel below where you can see our news articles plus more to help you figure out how your company can maximize on recurring revenue streams. There are two courses in there about vertical markets where recurring support models could make an awful lot of sense. So, have a look through them to understand how SDVoE fits in. And then go fit that to your recurring revenue model on top of that, plus there’s a course that explains how SDVoE is different than the AV systems that came before. Give yourself a new way to think about signal distribution and system management. SDVoE is recurring-revenue friendly. Anyway, we’re going to head back to Justin now to find out, what’s happening next week and I’ll see you very shortly in the aftershow.
Justin Kennington: 27:06
Thanks again, everybody for tuning in. I want you to catch us all on social media. Don’t forget to use the #SDVoELIVE. Also, I want to thank our sponsor for this episode, BLACKBOX. So, big thanks to BLACKBOX. And then I want to tell you that our next show is coming up on May 3rd. We have a very special treat for you on that episode. I’m not ready to tell you what it is yet, but make sure you tune in on May 3rd at the usual time, 1:00 PM US Eastern and see what that’s all about because we do this every two weeks. But if you miss an episode, don’t forget to check us out on our YouTube channel. That’s youtube.com/SDVoEAlliance. Head over there and like and subscribe. But now, I want you to stick around for the aftershow.
We’ve got some questions from you coming in, bring more in firstname.lastname@example.org. I also have a few more questions for Dan. I wanted to find out what can go wrong with recurring monthly revenue? What are the pitfalls to look out for? What are the mistakes that people have already made? And how can we learn to avoid those? So, make sure you watch for that. I’m looking forward to it. I hope you’re looking forward to it. Sit tight, the credits will be rolling momentarily and all you have to do is sit and don’t push any buttons at all. We’ll see you soon in the aftershow.