Magazine Article | July 2, 2018

Recurring Revenue & Operational Maturity

Source: Channel Executive Magazine

By Matt Pillar, chief editor

We last featured Chris Rumpf in 2013, back when we were still Business Solutions magazine, his company was still called Rumpf Computer Solutions, and recurring revenue was covering just south of 90 percent of his business’ operating expenses.

That year, Rumpf had tripled the monthly recurring revenue his company was earning from payment processing commissions, HaaS, and remote monitoring services. Five years ago, that kind of MSP-like activity was leading-edge stuff for a hospitality POS VAR, and Rumpf was promising to double-down. “Within the next five years, 200 percent of our operating expenses should be covered by recurring revenue services,” Rumpf told us at the time.


"A break-fix PC repairmanturned profitable managed services provider of hospitality and retail technology chronicles his business’ growth, fueled by recurring revenue and pricing strategy."

Chris Rumpf
President, CEO, & Founder, Flyght

 

Today, Rumpf’s company is called Flyght, and four years and 10 months after putting that 200 percent stake in the ground, he’s almost there. “I did the math,” said Rumpf. “We’re at 178 percent. I suspect that by the time a full five years rolls around, we’ll be pretty darn close.” Perhaps the greatest reward for Flyght’s focus on recurring revenue is that since 2013, it’s tripled its workforce. Not only has he added sales and engineering manpower to his payroll, but Rumpf himself is actually taking a paycheck again. He survived that awkward growth phase that moves mature VARs and service providers from small, comfortable lifestyle business to starving entrepreneur to profitable budding enterprise. “To become a partner in this channel, all you need to do is find a cool product, put it in the trunk of your car and roll down the street and see who wants to pay you not enough money to do whatever it is that you do,” says Rumpf, not even half-joking. “That’s not running a business. That’s not being an entrepreneur. That’s accommodating a lifestyle. In 2013, I don’t necessarily know that I knew the difference between those things.”

A LESSON IN FEAR AND RATE HIKES

For Rumpf, who launched his business from his mom’s apartment at the ripe age of 26, breaking out of lifestyle business mode was the result of maturity, experience, and learning. “Age and experience are obvious, but acquiring knowledge that you are aware you don’t have requires diligence,” he says.

“The only way that I'm profitable as an MSP is if my clients don’t call me, and the only way that clients don’t call me is if they’re successful, happy, and everything works.”

For Rumpf, that knowledge came in the form of business structure and management discipline. “I have a tendency to think of things with a microeconomic perspective,” says Rumpf. That’s not uncommon among lifestyle business owners. “Balancing a checkbook, that’s not hard,” he says, “but thinking about valuation, contemplating obtaining capital, developing pricing strategy and incentives for your people? Those things take knowledge and discipline.”

Rumpf says he’s spent hundreds, if not a thousand hours reading and going to conferences and meeting with mentors to understand what it means to run and grow a large organization. More directly, how to run and grow an organization while being true to what he terms a “culture of fun and irreverence.” He doesn’t claim to have it figured out. “ I really don’t think I have, but I’ve certainly gotten a lot closer,” he says. “We’re definitely on a path, and we know what that path looks like, where it goes, and how quickly we’re moving down it.” He attributes that vision to having more structure in place, and being able to draw clear, corollary lines between that structure and its benefit to the company’s individual associates at Flyght. That link is perhaps nowhere as clear as the corollary between the company’s pricing structure and its employee compensation plans.

A little under two years ago, Flyght implemented a significant rate increase in a specific effort to improve its profitability so that Rumpf could increase employee compensation. The exercise was successful on three fronts: Flyght made more money, it was able to afford salary increases, and it didn’t lose a single customer.

“I can’t yet say that everyone at Flyght is commensurately paid, because I still feel like a lot of the folks in our organization—myself included—are underpaid. I can say they are no longer egregiously underpaid.” Prior to setting this rate strategy in motion, the unapologetically blunt and always transparent Rumpf admits that he would sometimes “look at paychecks and cringe, knowing the disservice that I was doing to people and kind of wondering why the hell they were so loyal.”

For years, his apprehension about raising prices was derivative of his experience running a lifestyle business. When the “company” consisted of just him, he grossly undervalued his services. In 2004, he was a solo act charging $25 an hour to fix laptops. Over the course of a few years, he bumped his rate up in $10 increments. Soon he was charging $55 an hour for break-fix services. “I did the math and thought I’d be rich if I worked full time at that rate,” he recalls. “Long story short, after expenses and taxes we banked about $26,000 that year.” Still, Rumpf stood pat on his $55 service rate. “I was a fool, and I was fearful,” he admits. “I had a whole bunch of commercial clients that were getting a stupid good deal, and I was freaked out about raising their rates.”

When he finally did decide on a rate hike, Rumpf sweated it. He gave his clients a full six-months warning that their service rate would climb to $85 per hour via hand-delivered letters. “I didn’t get a single reply to that letter,” says Rumpf. “Not a single customer left when we implemented it.”

A year and a half later, Rumpf increased the rate to $99 per hour without notice. “Nobody left. Not a single customer even acknowledged it. They just paid the bill.”

Rumpf learned that his fear of raising prices was unfounded. “It’s fear of fear. If you’re running an actual business, you don’t fear raising prices, especially if you’re confident in what it is that you do.” He contends that if you don’t see the value in your company, concern that other people won’t either is natural but often unfounded. “Pricing should reflect your customer’s true value, not the business owner’s value.”

RECURRING REVENUE AND MANAGED SERVICES FOR VARs

Rumpf is a rabid fan of recurring revenue, which is why he was willing to lock in those customers who committed to a subscription plan at the $99 rate for break-fix services some 18 months ago. As an incentive to move all its customers to the recurring payment model, Flyght announced that the hourly rate would climb to $160 per hour and creep north of $200 per hour for after- hours service.

“We still have a handful of customers that are foolishly paying those exorbitant rates, but the great thing is that because we’re more profitable and we’re paying our technicians better, we’ve improved our customer service to the degree that even those customers are happy with us.” Rumpf says Flyght still has yet to lose a single customer over rate increases. And thanks to automation, those high nonsubscription rates are driving ever-larger profit margins. A software update that takes 5 to 10 minutes, for instance, gets billed at the full hourly rate for those customers not signed on to subscription services.

At present, Rumpf suggests that two-thirds of Flyght customers are on some form of recurring revenue plan, and roughly half are on a complete managed services setup for hardware, software, and services, with very little project work. Half of Flyght’s annual take is recurring revenue, a figure he says is growing exponentially. While that figure might sound low to a pure-play MSP, it’s high end for a “reseller” playing in the hospitality space. But that’s just it—Flyght has evolved into a company that more closely resembles an MSP than a VAR, and Rumpf is eager to share the glories of the managed services model with the traditional VAR channel.

“If you haven't figured out by now how to adapt to the change, … and you haven't believed or don't believe that managed services is your answer,r or you don't think you're capable of it, then I've tried my best to lead you to water, but I can't make you drink.”

POS VARs have shown a tendency of late to lose their lives to the recurring revenue transition. While Rumpf is clearly a fan, he’s also keenly aware that recurring revenue has scale limitations. For instance, grossing a quarter million dollars per month in subscription revenue sounds great, until you extract the salary expenses it takes to support that volume of subscribers. “Those numbers don’t work if you’re just recurring revenue,” says Rumpf. “They only work if you’re doing managed services and automating the heck out of everything you do.”

Rumpf outlines for us a few things he knows to be true about MSPs. “They’re really technical. They have the staff and the skills to continue to automate the systems that run their businesses. They automate the systems that touch their customers, so their customers don’t have to call them,” he says.

At face value, “don’t call us” might sound counter-intuitive to a VAR born of the break-fix or on-premise installation and support model. Rumpf says changing the client’s perspective, however, is key to the whole premise of managed services. “Clients are no longer paying for service, they’re paying for success. It becomes a win–win,” says Rumpf, “because the only way that I’m profitable as an MSP is if my clients don’t call me, and the only way that clients don’t call me is if they’re successful, happy, and everything works.”

“As an MSP, it's my duty to unify the technology in the ecosystem that I'm providing. As such, it's also way easier to sell customers things. Why not sell them things that they already are using or already need and would prefer to buy from me anyway?”

Though we’re not sure we can believe him, Rumpf says he’s done preaching the gospel of managed services to the POS channel. “If you haven’t figured out by now how to adapt to the change in the hospitality, retail, and restaurant industries, and you haven’t believed or don’t believe that managed services is your answer, or you don’t think you’re capable of it, then I’ve tried my best to lead you to water, but I can’t make you drink.”

Flyght’s trajectory does, however, offer reason to take that sip. In the POS space, average gross top-line recurring revenue per site per month is somewhere in the vicinity of $300 to $400. After expenses, Rumpf figures most VARs are netting about $250 on the high side.

In 2017, Flyght’s net revenue was $430 per site per month. This year, the deals Flyght is closing are closer to $600 in net margin. Rumpf believes by 2020, that value will approach $1,200 per location per month. What’s changed? On the top line, a higher value proposition. Flyght isn’t resting on payment residuals and POS sales. It’s going after the whole IT infrastructure and thus selling more stuff for more money. The year 2020 number Rumpf offers up is a reflection of a work-in-progress above-store management software platform that he’s not divulging much about right now. On the bottom line, margins are growing at the hands of his relentless pursuit to “automate the heck out of everything.” He continues, “I believe that as an MSP, it’s my duty to unify the technology in the ecosystem that I’m providing. As such, it’s also way easier to sell customers things. Why not sell them things that they already are using or already need and would prefer to buy from me anyway?”

POS: NO LONGER THE VAR’S GOLDEN HEN

While Rumpf holds his future plans close to the vest, it’s increasingly clear that Flyght would like to join a select segment of the POS partner community that’s adding software development to its repertoire.

“Most everyone doing anything in hospitality right now believes the POS is the central repository for ev-erything in the universe, like the sun,” says Rumpf. “I disagree vehemently with that assumption. The POS is not the wheel, but merely one more spoke.”

That’s about as much insight into Flyght’s skunkworks operation as Rumpf is willing to divulge right now, but he’s transparent about the opportunity driving the development, and it sits squarely in the hospitality solutions provider’s sweet spot. It’s that kind of blasphemous thinking that’s driving Flyght’s move toward software development. He points to the legions of $800K to million dollar-a-year merchants who are underserved by the IT channel because they’re stuck in a market gap; they can’t afford Oracle, but the legacy midmarket players are decreasingly able to meet those merchants’ needs because those vendors are being scooped up and dumbed down by giant payment ISOs. “Legacy systems are being gobbled up by the payment people for the merchant account, and that makes sense,” says Rumpf, “but all of them are following the same model, which is to develop their own software in the cloud. They’re finding that software development is hard, and they’re building predominantly for the low end of the market.”

That opens up a wide swath of opportunity for VARs and MSPs willing to offer a more sophisticated solution set — software included — to a more complex midmarket merchant. Flyght remains one to watch, and if you’re still operating as a pure-play VAR, one to emulate.