This retail and restaurant VAR returned from the brink to grow and prosper by embracing the sale of recurring revenue services.
Jim Stewart will be the first to tell you that he isn’t perfect, and he doesn’t have all the answers. He’ll also tell you that his company is what it is today — after three years of significant change — because he didn’t have a choice. Due to a series of events culminating in 2009, his company, Advanced Data Systems (ADS), didn’t have a very bright future. The exact details of what led ADS to that point are for another story. This story is about the changes Stewart took to turn things around.
His story is relevant because the new version of his company is built on a recurring revenue model. That is, most of his sales have a component of predictable monthly revenue he can count on. Whether it’s selling a POS system (hardware and software) as a bundled offering for a monthly fee, offering merchant processing, gift, loyalty, and so on, he’s left the break-fix business model in the past and now sells his solutions “as a Service.”
While I’m sure Stewart would rather not have had to go through the difficult times, today he’s realized that his company’s situation in 2008 forced him to change sooner than the rest of the industry. At a time when many retail and restaurant POS VARs are trying to figure out how to compete against “free” POS systems, direct-sale tablet POS apps, and an influx of credit-card-guys-turned-POSdealers, Stewart is a few years ahead of where many POS VARs realize they need to be.
One last thing Stewart will tell you: The change wasn’t easy. Some of the hardest decisions of his life have occurred over the past few years. Indeed, unless you’re sitting on a mountain of cash or have access to financial help, you need to find a way to offset the fact that breakfix offers large lump sums of money and “as a Service” doesn’t. Like many reading this article, Stewart didn’t have a pile of cash to cushion the transition. Therefore, he had to cut expenses.
Unless You’ve Stockpiled Cash, It’s Time To Reduce Expenses
“Reducing expenses” is the easy way to describe all the changes Stewart made in 2008. One of the most significant reductions came from moving the company from Cook County, Illinois — which shares Chicago’s tax burden — to just over the border in Indiana where ADS could still serve the same market. “Moving from a building we owned and operated in for decades was a difficult decision,” he recalls. “We considered subdividing our space and other ‘thinking outside-of-the box’ options but decided ultimately to start with a clean slate in a space that was geared for the direction we saw the business going.” That is, less need for both a shiny showroom that customers don’t visit and areas to store lots of spare inventory.
Rather than owning a building, Stewart decided to rent, saying that the current state of the real estate market means that there are some great deals to be had when negotiating a rental agreement. Stewart says he saves about $5,000 a month in property expense alone. Additionally, the strategic move to Indiana was partly a result of the VAR’s analysis of where his techs were traveling. Therefore, the move also reduced fuel expenses by approximately $1,000 a month. Daily $10 tolls were eliminated as well, saving more than $2,500 a year. All said, the move reduced his building and utility expenditures by more than 70%.
Additionally, an even more difficult decision was the need to reduce payroll. Since 2008, the VAR has cut its payroll by nearly 40%. Stewart recalls many sleepless nights as he came to grips with the need to make such changes. Like many POS VARs, ADS is family owned and operated and has been for decades. Employee retention was high and Stewart was close to the employees he literally grew up with.
Unfortunately, as you know, payroll and healthcare benefits are a huge expense. And, as with the decision to move to a smaller office space, Stewart’s future business model was more streamlined and didn’t require the number of employees he had.
Stewart gets very serious when he speaks about this aspect of his transition, particularly when he considers all the POS VARs who have yet to make the transition to the as-a-Service model. “Whether they know it yet or not, many of my peers are overstaffed to profitably run the as-a-Service model,” he explains. “The fact is, with this model you don’t need the same number or type of employees that you do on the break-fix model.” In short, Stewart believes massive staffing reductions are in the near future of many VARs.
Build Out Your Portfolio Of Recurring Revenue Offerings
Reducing expenses is one thing, but what about making some money? To date, Stewart has six recurring revenue options he offers customers. While he feels VARs could jump in and offer all of them immediately, he took a staged approach to adding the services.
First was payment processing because it’s the easiest to build and has the biggest financial impact. Like most VARs, ADS has offered card processing for years. And, like many VARs, it wasn’t made a priority. “Back in 2006, when we started in processing, it was difficult, resulted in tons of support calls [Stewart says credit card support calls still account for 70% of after-hours calls], and looked like it didn’t bring in much money,” he says.
When you look at your monthly revenue and you see that you earned a whopping $300 in credit card residuals, you wonder if it’s worth all the effort. Stewart says many VARs overlook the fact that $300 a month is $3,600 a year to their bottom line with no cost of goods sold. Once you increase your efforts, the residuals really make a difference. “We’re now boarding 90% of new customers and making card processing a big priority,” he says. The result is that credit card residuals for ADS are in the sixdigits.
One reason the credit card business is so successful is that acquirers have realized that POS VARs are the gatekeepers between them and merchants. “Everyone is starting a reseller program and wants to recruit our kind,” he continues. “And we’ve found our merchants are happy to do credit card processing with us, their trusted adviser, and put the ISO and independent agent calls in their past.”
When it comes to card processing, Stewart feels that you’re in the driver’s seat. “Sales can go up and down, but you can go out and close credit card business fairly easily,” he says. “As we made the transition, I would set goals that we always hit.” For instance, early on, Stewart’s first goal was to cover a car payment with his monthly residuals. Then two cars. Then utility bills, one payroll, and so on.
ADS’ next offering, and a natural segue from card processing, is gift cards. Today, the VAR says gift cards bring in $400 to $2,000 a month. The key, he says, to having success is to sell them as you would a POS system. That is, get merchants excited about the benefits. “So many VARs take the sale tactic with gift cards that most cards will get lost or remain unused,” says Stewart. “Totally wrong message. We excite merchants by showing how they can use gift cards as marketing tools to engage with customers and their surrounding community.” For instance, one ADS customer buys thousands of cards every month, puts a couple of dollars on each, and then gives them to students in the local school district who achieve certain grades. It gets the merchant’s brand in the minds of thousands and gets people coming into the store to spend more than the couple of dollars.
From gift cards, Stewart added services like Mercury Loyalty (earning $50 a month per customer boarded), Web-based reporting through NCC Reflection ($20 a month per customer), online ordering ($30 a month), and the sale of supplies. As with card processing, all of these services add up to create a considerable stream of predictable recurring revenue.
POS Hardware, Software, Processing: Billed Monthly
As the recurring revenue from these offerings built up over time, Stewart moved to the next stage of ADS’ evolution — offering Solutions-as-a-Service. Currently, he offers customers POS systems for a monthly fee (subscription model, leased, rent-to-own, whatever you want to call it) via two methods. The first is through Harbortouch (the industry’s most [in]famous “free” POS offering). The other is via a three-way partnership between CRS, Mercury, and NCC. In both cases, the bottom line is that to ADS there’s no cost of goods sold, and there is a kicker of cash during the initial install and recurring revenue over the next few years.
In the case of the tri-partnered offering, Stewart says he has minimal skin in the game. “The worst case is that if a customer closes, I’m out 50% of whatever’s left to the cost of the hardware,” he explains. “If possible, I can reclaim the equipment and use it somewhere else. Essentially, my future Mercury residual is the collateral. If you self-fund this model, you’re on the hook for everything.”
Currently, Stewart is planning the next step in his company’s progression. He’s evaluating remote monitoring and management offerings like Vigilix to offer to customers (for a monthly fee, of course). Even with new technology he’s offering, like digital signage, he’s finding ways to build in a recurring revenue component.
What Stewart might not know is that he’s making the same moves the most successful managed services providers (MSPs) in the traditional networking space make — he continues to add services to his portfolio that he can offer to customers. The long-term effect is that he’s building that recurring revenue into a sizeable monthly nut and making his relationship with his customers more sticky.
After years of hard work and 70-hour work weeks, Stewart says ADS turned the profitability corner last year, and this year is shaping up to be his most profitable in years. Despite all the hardship, the VAR will say that he’s lucky things happened when they did. “If you haven’t started the transition, it’s going to be even more difficult,” he says. “Now there’s a lot of competition from new guys who started on this model when they entered the industry. The transition’s going to be painful, and it won’t happen overnight.” But really, what alternative do you have?