Let’s begin with the graphic below. This reflects what we think, and have demonstrated to people we work with. This is creating Annuity Revenue.
We will proceed to show you how to achieve this financial success by:
In the end, these actions lead to developing a repeatable and predictable revenue and profit stream.
If you manage a high tech business, you are always looking for ways to create a continuously growing revenue and profit stream (we refer to this as annuity revenue) while creating loyal and engaged customers. The key take-away of the TSIA October 2009 World Conference was that the era of product sale pulling service revenue is drawing to an end...service revenue is already beginning to pull product and the buyer buys based upon features and usability.
Also, at the same conference, HP was quoted as saying, “Service will be challenged to reduce product complexity and accelerate the realization of product value.” Gary Budzinsky, SVP and GM of HP Enterprise Business Technology Services pointed out the following in his presentation “HP Technology Services Transformation and Futures”. Among the primary influencers of the client experiences are:
- Services led selling: Go-to market with technology consulting.
- Technical Support drives product sales by accelerating time to value and the consumption of value.
- Mission Critical intellectual property.
Gary also points out that Service keeps the technology running and consulting is the ‘Expertise’ connection with the customer. We suggest you think about this as we continue.
What is annuity revenue?
Annuity revenue is a predictable stream of revenue and profits derived from a wide variety of sources. They are a part of the company backlog, are generated from an increase in customer satisfaction and loyalty, and in many cases they differentiate one company’s products and services from the pack. To compare discrete product with annuity revenue, we first take a 30,000-foot look at both sources of revenue (and profits):
- Discrete product or service – a stand-alone sale to either new or repeat customers (even if purchased under a blanket order) and unlikely to repeat for a number of years.
- Annuity revenue – a predictable revenue stream from new or existing customers who buy products and services associated with new or previously purchased products. Many times this term is used in conjunction with value added services.
Comparing both sources of revenue; we have been able to demonstrate to companies we work with that annuity sales have a number of significant advantages:
- Some annuity services can be included with the initial purchase:
- Solution selling makes the overall sale easier.
- Financing may make the sale possible.
- Value added services can become a competitive lockout differentiator.
- Lower selling costs, since the prospect is already your customer, or will soon become one – no need to begin establishing a relationship.
- Your total revenue stream will be more predictable or consistent. For years, Xerox has reported over 70% of its annual revenue as annuity revenue.
- You have moved your customer relationship to a higher level and are therefore enjoying the benefits of increased recommendations, repeat purchases and higher margins.
Is generating an annuity stream a new concept?
Absolutely not! This is a strategy that has been around for a long time.
- In 1904, Boston-based inventor King Camp Gillette received a patent for an improved safety razor with a disposable blade. He realized that profits lay in selling the razor for less than it cost to make and the disposable blades for more. His revolutionary idea has come to be known as the “Razor and Blades,” or “loss leader,” business model.
- Kodachrome was invented in the early 1930s and first sold in 1935. Cameras were relatively inexpensive and Kodak and others made most of their profits from film sales.
You get the idea. Products using disposables have been generating annuity revenue for at least a century. However, the idea of selling value added services (VAS) as annuity revenue is much newer.
