How to Make Money Selling More Than AV Systems
In a tough business climate, stability is key. As a result, many AV pros are focused on diversification. Their goal? Create new services or grow existing offerings in order to generate recurring, more predictable revenue, from maintenance contracts and training to content. Here's how.
Todd Lucy of South Western Communications says that as AV systems grow more IT-centric, it helps open the door to fresh service and maintenance agreements.
Credit: David Harpe
Many integrators are well aware of the value of services as a way to differentiate their firms from companies that merely fill orders for gear. Successful integrators promote design, integration, installation, and system commissioning services to set themselves apart. Frankly, these services are now inherent to almost any project, as clients have come to expect a high-quality, functioning system versus a set of components. Which means pros must now look further afield to identify services they can offer that provide value.
"As our systems become more software- and IT-based, it is opening the door to service and maintenance agreements," says Todd Lucy of integration firm South Western Communications in Newburgh, Ind. "IT staffs expect it, and many manufacturers are beginning to charge us for annual software upgrades. This is creating a market."
But saying you want to run a services business and actually doing it are two different things. Ask yourself how services will benefit your business. What are some of the revenue opportunities you can seize? What success factors are at the heart of these services? What are the potential pitfalls? In short, plan ahead.
Why Services in the First Place?
Cash flow is the lifeblood of any firm. It's not the annual revenues that reveal the financial health of a business; it's the timing of revenues against the outlay of expenses. By its very nature, AV integration work is structured around projects, whether they're large, complex projects that span a year, or small, quick-in-quick-out projects. Successful firms have developed project management expertise that allow them to manage and deliver multiple projects adroitly, on time and on budget. But dealing with cash flow peaks and valleys can be most daunting.
Part of the business model for project work is managing the sequence of expenses that typically precede a project's milestone payments. Timing is everything, and recurring services revenue can be a stream that flows in between outlays.
Another upside of recurring services revenue is the potential gross margin contribution if the service is priced carefully. Lucy says that margins on service work can be double those of contract work.
"The overall goal is to have sufficient income from recurring revenue contracts to cover basic overhead," says Brad Nelson of Sound Solutions Northwest in Kennewick, Wash. "That frees up the cash flow to take on project work and allows the company to take more financial risks."
Cash flow modulation, though arguably the biggest advantage of a services strategy, is not the only one. It almost goes without saying that the more ways you can work with clients, the more likely you are to win a steady stream of projects. (See sidebar, "Ten Reasons to Grow Your Services Business.") But what are these services, and which should you offer?
All too often we think of product as tangible goods. In the pro AV industry that usually means gear. But technically, product is anything you can sell. As such, services are products and should be planned, packaged, and marketed that way.
As soon as you include services in your list of products, you can "productize" them and make them more tangible and more sellable. What do all products have? Features, functions, benefits, and lifespan. The three main categories of recurring revenue products for AV integrators are service/maintenance, training, and content.
The Backbone of a Services Business
Service and maintenance agreements can be sold at any time, either as needed or at the initial project sales stage. The agreements can be included in the proposal as an option or rolled into the purchase price. When the agreement is purchased as part of the whole system, the fee is part of the capital system expense, and the integrator ensures continuity with the client from the beginning.
"[Service agreements] are offered when a project is sold, but practically, they must be followed up on when the warranty is completed," Lucy says. His firm's typical contracts are for one year with a revolving clause indicating the contract will renew unless cancelled.
Of course, not all your clients are ripe for a contract. "You have to know how the client operates," Nelson says. One challenge is client perception. If it's not positioned properly, proposing a service agreement with a system purchase can send a mixed message that leads the client to wonder why they'd need a service contract on a system that was supposed to be reliable in the first place.
Nelson makes clear distinctions between his company's service agreements and its maintenance agreements, with the former tied more to "things breaking down" and the latter focused on calibrating and maintaining the system in optimal condition. A service call, under the agreement, is generated in response to a specific need; a maintenance call is preventative and scheduled regularly.