In mid-2015, I wrote an article for Business Solutions Magazine titled, “A Managed Services Tsunami In POS/Bar Coding Is Coming. Don't Say You Weren't Warned.” It was based on my observations in the channel related to the as-a-Service/recurring revenue business model and my interview with ScanSource CTO/Technology Evangelist Greg Dixon, one of the channel’s most outspoken leaders on this trend. Regarding VARs who are not shifting to the recurring revenue business model, Dixon said, “There’s a discomfort there that they can’t deny. They can’t deny the world is changing below their feet, and only a fool stands still when the ground moves.”
In Vantiv’s POS Channel KPI Study, we made sure to ask questions about the as-a-Service/recurring revenue business model. A total of 91 resellers and ISVs shared their financial KPIs (key performance indicators) with nearly two-thirds of them (58 solution providers) choosing to provide data on their business model transition.
Our first question about this trend asked, “Which of the following statements best describes your business in regards to the transition to the as-a-Service/recurring revenue business model?” Respondents said:
- 100% completely transitioned; all our customers pay a monthly fee; extremely limited project work: 10.3%
- Mostly transitioned (61-84%); most of our customers pay a monthly fee; limited project work: 13.8%
- Halfway transitioned (40-60%); about half of our customers pay a monthly fee; about half of our billing is for project work: 20.7%
- Partially transitioned (16-39%); some of our customers pay a monthly fee; significant project work: 22.4%
- Barely transitioned (1-15%); very few of our customers pay a monthly fee; we do mostly project work: 20.7%
- 0% Not transitioned; no customers pay a monthly fee; all project work: 12.1%
Our second question asked them to look ahead. “One year from now, where do you plan to be in the transition to the as-a-Service/recurring revenue business model?” Respondents said:
- 100% completely transitioned: 18.9%
- Mostly transitioned (61-84%): 15.5%
- Halfway transitioned (40-60%): 29.3%
- Partially transitioned (16-39%): 18.9%
- Barely transitioned (1-15%): 8.6%
- 0% Not transitioned: 3.5%
- I have no plans to transition to this business model: 5.2%
The data that first jumped out to me was the proof that the POS channel has been moving with this trend and will continue to do so. For 2016, 44.8% of respondents are approx. halfway or more transitioned to this business model, and that number should increase next year. For 2017, 63.7% of respondents expect to be approx. halfway or more transitioned to this business model, an uptick of 18.9% over just one year. That’s not exactly a quantum leap, but still fairly significant in an industry where even a single-digit change in numbers can feel drastic.
There’s movement at the bottom of the recurring revenue business model pyramid as well. In 2016, 32.8% of resellers/ISVs told us they were either “barely transitioned” or “not transitioned” to a recurring revenue business model. For 2017, the numbers say to expect only 17.3% of resellers/ISVs to be in those same categories, a drop of 15.5%. And with only 5.2% of respondents saying they have no plans to transition to this business model, that means 95% of the POS channel plans to shift to the recurring revenue model in some form.
It wasn’t that long ago that Mercury Payment Systems (now Vantiv) took the POS channel by storm introducing POS dealers to residual income through payment processing. And I recall a 2014 RetailNOW presentation on this business model that drew only one audience comment from a reseller: “This will never work.” Our channel has transitioned quite a bit from then, with solution providers of all sizes fully embracing payment residuals along with adding managed services to their offering.
Now back to the stats. Let’s split resellers and developers to see if there’s a difference between the two on this trend. First, the 2016 numbers:
- 100% completely transitioned: Resellers: 5.0% ISVs: 30.7%
- Mostly transitioned (61-84%): Resellers: 15.0% ISVs: 15.4%
- Halfway transitioned (40-60%): Resellers: 22.5% ISVs: 7.7%
- Partially transitioned (16-39%): Resellers: 22.5% ISVs: 15.4%
- Barely transitioned (1-15%): Resellers: 27.5% ISVs: 0%
- 0% Not transitioned: Resellers: 7.5% ISVs: 30.8%
The 2017 projections show both resellers and ISVs are moving towards the recurring revenue model:
- 100% completely transitioned: Resellers: 12.5% ISVs: 46.2%
- Mostly transitioned (61-84%): Resellers: 17.5% ISVs: 7.7%
- Halfway transitioned (40-60%): Resellers: 30.0% ISVs: 7.7%
- Partially transitioned (16-39%): Resellers: 25.0% ISVs: 7.7%
- Barely transitioned (1-15%): Resellers: 7.5% ISVs: 15.4%
- 0% Not transitioned: Resellers: 5.0% ISVs: 0%
- I have no plans to transition to this business model: Resellers: 2.5% ISVs: 15.4%
I don’t think it’s any shock that ISVs are ahead of resellers with this business model. It’s far less complex to make your software available via a monthly fee than it is to sell hardware in that manner. For 2016, 20% of resellers say they are “mostly” or “completely” transitioned to this model while 46.1% of ISVs placed themselves in those categories. On the flip side, it was interesting to note that nearly a third of ISVs (30.8%) in our survey are not transitioned at all while only 7.5% of resellers fit into that category.
The 2017 projections show resellers continuing to aggressively move towards shifting their business to the as-a-Service/recurring revenue model; 60% of VAR respondents expect they will be approx. halfway transitioned or more in 2017. And while 35% of resellers said they were “barely” or “not transitioned” in 2016, only 15% expect to be in that position by the end of this year.
It seems nearly all resellers are working to move their business in this direction. Only 2.5% reported they have no plans to transition to the recurring revenue model vs. 15.4% of ISVs.
The trend we see among resellers also appears evident among ISV/VAR hybrids. Too small a sample size of hybrids participated in the recurring revenue part of the survey for us to draw finite conclusions for this group, but all hybrid respondents expect to be at least “halfway” transitioned to this model in 2017. Their 2016 responses ranged from “barely” to “partially” to “halfway” with none of them “mostly” or “completely” transitioned.
I’m encouraged by the results of the recurring revenue segment of our KPI study. The as-a-Service business model is the best path for solution providers who want achieve greater profits while building a sustainable business model that will be of real value when they retire or hand the reins to the next generation. As I mentioned earlier, not long ago most of the POS channel was either just learning or fighting this trend, and now almost everyone is taking steps in the right direction.
Throughout March, look for additional insights from Vantiv’s POS Channel KPI Study via “On the Edge with Jim Roddy” (this is article Part 2 of 3) and a piece I’ll write for Business Solutions Magazine. These articles (plus bonus content) will be compiled into a comprehensive special report available only to Vantiv partners.
Our Part 1 article focused on Annual Revenue Growth Rate and Net Profit Margins. In our third and final installment, I plan to share exclusive data on the POS channel related to:
- Recurring revenue as part of sales
- Revenue per employee
- Payroll expenses
- Marketing expenses
- R&D and development expenses
Please email me if you have thoughts or questions about our KPI study or would like to discuss these numbers in-depth. My job as a Reseller & ISV Business Advisor for Vantiv’s PaymentsEdge Advisory Services is to work with Vantiv partners to help them improve their effectiveness and implement best practices – including transitioning to the recurring revenue business model – so please reach out to me anytime if I can be of assistance.