Generating Recurring Revenue in the Smart Home Industry

What is recurring revenue?

Recurring revenue comprises any type of service for which you can charge a regular fee. In smart home integrator terms, these services may look like:

• Service contracts
• Support packages
• Remote monitoring.

These may be annual recurring revenue (ARR), which are typically things like system maintenance. Alternatively, monthly recurring revenue (MRR) may refer to subscriptions such as streaming.

With the rise of subscription models for technology, ARR or MRR should come as no surprise to new customers. They also give smart home integrators flexibility over upgrades, downgrades, and any upselling or cross-selling opportunities.

The benefits of a recurring revenue model

This business model works for both integrators and their customers. From a business perspective, there is predictable revenue from monthly renewals or annual subscriptions. In turn, this is great for long-term business valuation: Software as a Service (SaaS) companies with guaranteed future revenue are generally valued higher.

From a customer perspective, perhaps the most important metric of all is service. Yearly or monthly subscriptions give integrators the chance to strengthen their relationships with customers. Think about regular maintenance visits, or even loyalty bonuses for committing to yearly subscriptions, such as money off parts and labour.

Both parties benefit from better scheduling, too. Integrators have guaranteed revenue streams and can plan their work in, while existing customers have the assurance of long-term service.

Strategic opportunities in smart home integration

It’s important to remember here that we’re selling more than just devices. Home cinemas or security systems don’t need to be one-time sales.

For long-term customer retention, we should focus on reliability and convenience. Many other sectors are subscription-based businesses, such as security and IT. We can do the same by introducing add-ons or ‘Total Care Packages’, for example:

• Remote diagnostics
• Preventative maintenance
• Priority support.

These may prove effective in your customer acquisition process, too. Think how much more valued a customer is going to feel when they have priority support as part of the deal.

When and how to introduce recurring revenue packages

So, when exactly can we introduce these packages to push up our total revenue? If you want to establish trust with a client, it’s best to show them ARR calculations during the initial sale.

Here is your chance to enhance contract value from the off, focusing on long-term value for money rather than extra charges. Customers can forecast their spend and get a transparent view of what they’re paying for.

When presenting the package, think about who your customer is:

• Clients with smaller budgets: They appreciate transparency and predictability with monthly packages. They’re used to multiple, smaller subscriptions, so the facts and figures should be clearly presented.
• Clients with larger budgets: On the other hand, clients with larger budgets may just want a total amount. They may have ‘subscription fatigue’ and would sooner have everything packaged up, ready to pay annually.

Either way, the sales process helps customers focus on the overall plan for keeping them up and running with the latest proven technology.

Case study: Better…By Design, LLC

This kind of financial modelling is one of the best-known growth strategies, but it also impacts operational efficiency. For example, it’s better to automate maintenance appointments and prevent risks before they become critical errors.

Michael Pope, Principal at design and build company Better…By Design, LLC, notes these benefits on top of subscription revenue. “We found that by adding all preventative maintenance and remote monitoring into one package, our callbacks were reduced by 50%. Some clients were so happy that they even came back and purchased more equipment.”

Compounding value over time

Your company’s growth will also be impacted by the ARR growth rate. This is known as compounding value over time. Mike Maniscalco, Co-Founder of Ihiji (now owned by Control4), states that a typical service contract comprises around 5 to 8% of the installed contracted price.

“With recurring revenue, time is your enemy and speed is your friend,” he says. The more installations completed and sold with a service contract, the more the revenue compounds. For example, over a period of three years, with a service contract making up 5%, we might see:

Getting started: tips for integrators

If you’re new to a monthly or annual revenue model, there are ways you can improve your chances of success. This starts with consulting with your peers – for example, joining CEDIA to get access to events and online resources.

With these tried-and-tested methods, you can then set about making your own packages. This starts with estimating labour for maintenance visits, giving you a benchmark for other services. As time passes, you’ll be able to adjust your plans based on real-world data and client feedback.

Test, refine, iterate – and you’ll see revenue compounding over years, offering profitability and sustainability.