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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, mor 10/06/2009 7:45 AM Eastern

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

Business stability has been front-of-mind this past year, due in part to uncertainties wrought by economic conditions. As a result, many AV integrators are focused on diversification. Their goal? Create new services that generate recurring, more predictable revenue.

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.



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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.

Sound Solutions Northwest's preventative maintenance contracts are structured around twice-yearly visits to maintain and recalibrate the system. This casts the firm in a positive, proactive light and associates Nelson's company with a system that's working correctly versus one needing repair. As part of the deal, Sound Solutions Northwest also offers a 10 percent discount on system upgrades and 20 percent discount on service calls.

Keep in mind, service or maintenance agreements should fall outside the basic system warranty. In fact, Sound Solutions Northwest offers maintenance agreements with visits occurring at the end of warranties. "These [maintenance checks] are designed to go through the system from top to bottom. The client pays for that up front, but gets a 20 percent discount if they purchase it with the system."

When the contract is separate from the initial system purchase, it's typical to bill maintenance contracts on a monthly basis, benefiting the cash flow of both the client and the contractor. "The maintenance component [of the contract] usually calls for biannual or quarterly maintenance," says Lucy. "[Customers] would also receive preferred response time and rate. We will also, at times, price in and stock certain system components in the event of failure."

Many firms see increasing their services as a growth opportunity. Rob Geerdts of Arrow Audio, an integration firm in Kimberly, Wis., says his company sells service in 80-hour blocks, which works well for a local military base it supports. The blocks mean Arrow Audio is on call for as long as there's time left in a block.

"We haven't really done much with service contracts, though," Geerdts says. "Mostly because we don't think of it. We're busy working on what's in front of us."

Geerdts realizes that in order to commit itself to selling and maintaining service contacts, Arrow Audio would need to invest in the initiative. "We need dedicated staff," says Geerdts. "And we don't [currently] have anybody calling the customers on the back side. But it could be a good upside for our firm."



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.

Thinking it Through

So if yours is an AV integration firm like Arrow Audio and you know that growing your services business could boost revenue, what are the specifics you need to take into account? There are several elements to a service program you need to map out, and almost all of them come back to pricing. It's important you perform due diligence and take into account all costs–foreseen and potentially unforeseen–of a planned service program before it's ready for prime time. Everything from your geographical reach to the test equipment you might need will affect your costs. But the biggest consideration is human capital.

Staff planning is vital. One company, for instance, might develop a "quick response team" that takes care of smaller service and maintenance jobs, allowing the regular team of installers to stay focused on projects at hand. You also should consider how on call you want your service staff to be. Nelson says you need to think hard about whether you can/want to offer 24/7 support. Because if so, staff likely should be paid to be on call, which can have overtime implications, too.

As you might expect, the caliber of your company's service and maintenance staff needs to be high. They require good diagnostic skills, which can be different from good installation skills, and often need specialized expertise, such as the ability to handle video color calibration, time/energy/frequency analysis, or, increasingly, network troubleshooting.

Furthermore, the service staff becomes the ongoing face of the company, so they need to work well with customers. And, depending on your company, they can be a jack-of-all-trades, servicing a client's AV systems while at the same time spotting sales opportunities as they arise.

"Service technicians are typically our most senior staff with particular troubleshooting skills," Lucy says. "Good ones are hard to come by."

Of course, you won't have service contracts to staff unless you sell them, so sales planning is important, too, not just for hitting revenue targets but also for replacing service clients who drop off. Nelson says on average, across the industry, you can expect 20 percent of clients to drop their contracts at renewal time.

Other Flavors of Service

While ongoing service and maintenance is the most obvious, and in many cases the most lucrative, form of recurring AV revenue, it's not the only type of service. Training, beyond simply how to use the systems you install, can be another offering, especially if you have certain in-house expertise in a particular technology area such as videoconferencing, digital signal processing, or digital signage. Training needs can vary widely depending on the client, the venue, and the type of system, so being able to tailor courses to a particular audience is important.

In Nelson's experience, training services are highest in demand at the university level, and timing of that demand is fairly predictable–it comes at the beginning of each new school year. Nelson says K-12 training can be more difficult to schedule because logistics usually go through a central office and must then be coordinated with the school maintenance or the tech department. Even less predictable are houses of worship, which typically need training only when there is a turnover in their "media ministry."

Lucy says health care facilities are also training customers. "We sell training hours to schools for professional development and to hospitals for retraining. These are typically offered in time blocks at reduced rate or as time and material."



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.

Content Delivery Services

Meggin Anderson of Baystate Audio and Media says her company typically secures five-year contracts for supplying and managing business music. The company is also exploring digital signage advertising and content.

Meggin Anderson of Baystate Audio and Media says her company typically secures five-year contracts for supplying and managing business music. The company is also exploring digital signage advertising and content.

Credit: Matt Teuten/Aurora Select

And as AV becomes as much about the message as the messenger, offering content services can open a fresh revenue stream, though it likely falls further outside a company's core skill set. Even if you have no interest in investing in the software, hardware, and IT skills needed to create, store, and/or deliver digital signage content, for example, there are pieces of the pie worth carving off.

Traditionally, so-called business music was classified as background music (aka "elevator music"), whose sole purpose was to be noticed only in its absence. Now, as foreground music (often paired with video), it's meant to be noticed and can be key to branding strategies in retail and hospitality venues. AV companies that provide such multimedia content enjoy recurring revenue, typically on a subscription basis. "The recurring content supply through subscription is a small but growing part of our business" says Meggin Anderson of Baystate Audio and Media in Shrewsbury, Mass., a systems integration firm that also offers business music. "It accounts for about 25 [percent] to 30 percent of our revenue."

Anderson says opportunities to supply content are exploding. And with the right offerings, content services can mean reliable revenue. Baystate's typical contract has been for five years, though the company offers one-, three-, and five-year contracts.

"We add incentives to stay with us or to take on a longer term," Anderson says. "Typically our clients only cancel if they go out of business." Why? Anderson says the key is excellent service. "Our systems come with a warranty that includes service. Also, we do all the ASCAP and BMI reporting [required by law for using copyrighted content in a commercial setting], and we promote that to the customer. It keeps them legally safe and also saves them the legwork of having to do it themselves."

Business music and video integrators, who might be considered digital signage companies, need an understanding of branding and how their content helps clients. Integrating advertising can help offset system and subscription costs.

For many AV integrators, this is all a new frontier. "We're dabbling in digital signage by bringing in advertising," Anderson says. "We have an independent vendor we partner with that can do content creation, including producing in-house ads for our clients."

But ultimately, any plan for generating recurring services revenue comes back to the same thing. Asked for the key to Baystate Audio and Media's success, Anderson answers simply, "It's our support."

Jeanne Stiernberg is a principal consultant with Stiernberg Consulting, a Sherman Oaks, Calif.-based business development consultancy serving the converging entertainment technology, music products, and electronic systems industry worldwide. E-mail her at jeanne@stiernberg.com.



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