In previous blog posts, articles, and books, I have written extensively on the product to service mix of technology companies:
How Much Revenue from Services?
The bottom line: service revenues are critical to the economic health of product companies.
The Growing Annuity Revenue Stream
It is important to understand that the majority of the service revenues for product companies are annuity based revenues. In other words, the customer is signing an annual or multi-year agreement for services. These can be support services or managed services. For mature software companies, these annuity service revenues can easily represent 40% to 70% of total company revenues. Now, layer on the fact that some software and hardware revenues are migrating to subscription pricing models. These revenues are classified as service revenues and become another annuity revenue stream that must be managed. When the dust settles, product companies will find that the vast majority of their revenues will be represented by annuity based services. If this the direction revenues are heading, then product companies had better be VERY good at managing this type of revenue stream.
Service Revenue Generation
From the TSIA perspective, Service Revenue Generation (SRG) is the discipline of attaching, renewing, and up selling technology services. This discipline cuts across sales, marketing, and service delivery activities. To be excellent in this discipline is to be excellent at protecting and growing annuity based service revenues. The diagram below scopes the activities and revenue streams related to SRG:
Service Revenue Generation Dashboard
Now, how does a product company know if they are good at service revenue generation? This is the very question we asked Julia Stegman. Julia is a sales executive with extensive experience in protecting and growing annuity based service revenues. She has recently joined the TSIA team to lead our research efforts in the area of Service Revenue Generation.
Julia argues that product companies must excel at three key motions if they hope to protect and grow annuity service revenues:
- Attaching service contracts to initial product sales
- Renewing annuity based service contracts
- Selling new service contracts that are not related to a recent product transaction
Below is a draft of the dashboard view of these three motions.
What specific practices should product companies have in place to move the needles on this dashboard? What metrics should companies be tracking related to these three motions? Julia has been working with an advisory board of industry executives to finalize the answers to these very questions. For more information on this new TSIA initiative, I recommend you contact Julia directly at firstname.lastname@example.org. You can also follow her blog “Up and to the Right.”
All I can say, is that there is a lot of money on the table here. Annuity service revenue streams: that is where the growth game will be played for so many product companies.