When it comes to cloud, the outlook is definitely positive as well as profitable. And it can be easy to get carried away with the excitement. Yet even if the model is built on recurring revenue, it’s not a simple, easy-to-initiate influx of never-ending cash.
Developing a cloud business requires real work. It takes investment—and reinvestment—of time, money and effort. The question you may be asking is how much.
Investing in tomorrow’s success
According to the 2018 State of the U.S. Cloud Channel report by The 2112 Group, in conjunction with Ingram Micro Cloud and Microsoft, the average solution provider is reinvesting 13% of its gross revenue—up from less than 10% in 2017—in the development of new cloud services, capabilities and capacities. A solution provider that generates $1 million in gross cloud sales, for example, would be pouring back as much as $130,000 into its business.
That may seem like a lot, but much of that is likely due to solution providers playing catch-up in developing their cloud capabilities. More mature businesses should reinvest about 15% of their gross profit into business development. By reinvesting profit, solution providers can expand capabilities without impacting operational expenses. While that requires taking less profit out of the business in terms of returns to the ownership, it doesn’t impact a company’s market valuation.
In practical terms, you should reinvest in their cloud practices what they can reasonably afford without impacting the viability of overall operations. That means they should budget funds that help expand the business, improve market value and have a reasonable expectation of ROI.
Where should solution providers invest in their cloud practices? Keep in mind that not everything is about product. The cloud and recurring revenue model are dependent on capturing, expanding and retaining accounts. Reinvestment, therefore, should focus on those three pillars.
Capture: Get your customers to buy
All cloud-based businesses need a steady flow of new accounts to generate revenue. Solution providers should allocate funds to sales and marketing to attract new customers. Marketing cloud services is about ensuring that both potential and existing customers are aware of the available cloud solutions and their value propositions as well as available professional and managed services. Without marketing, cloud capabilities are largely a well-kept secret.
Investing in sales is equally important. Historically, solution providers have not provided enough resources for their sales efforts in favor of delivering technical capabilities and support. But without salespeople, solution providers have limited capacity for engaging with clients to fulfill their cloud needs. And without salespeople, it’s harder for solution providers to turn opportunities into revenue.
Expand: Get them to buy more
Landing cloud customers isn’t the only measure of cloud computing success. Solution providers must practice “land and expand,” ratcheting up revenue by getting customers to buy more products and increase consumption. What’s key to your expansion strategy is to acquire new services that complement and enhance the value of existing cloud resources.
As a solution provider, you should invest in developing new relationships with vendors that have marketable products, expanding relationships with existing vendors, training sales and technical staff on how to sell and support new products, and marketing aimed at promoting their offerings.
Retain: Get them to keep buying
The recurring revenue associated with most cloud computing services depends on low account attrition. You should aim to retain at least 95% of accounts—ideally more—with each contract renewal cycle. To achieve and maintain that level of customer retention, you’ll want to invest in customer relationship management and account specialists who actively engage customers to ensure they have a superior experience.
In addition, you should devote part of your marketing budget to communicating with existing customers to ensure they remain aware of your full portfolio of products and services. Also, it’s wise to invest in platforms that enable smooth management of your customer accounts and provide automated resources that allow customers to access support and information whenever they need it.
If there’s a common thread in this reinvestment guidance, it’s engagement. Solution providers can’t afford to build static cloud practices. Success in cloud computing comes from persistent contact with the market and customers. Through continuous reinvestment and reinforcement of your value proposition, you can build your cloud practice to stand the test of time.
See how your cloud practice stacks up
Explore 2112 Cloud Altimeter—a cloud assessment tool exclusively for Ingram Micro partners. By collecting answers to a few questions about your company and its cloud practice, the tool will generate a comprehensive report on how your company compares to others in the same class. To find out how your business measures up in the cloud, visit the 2112 Group Cloud Altimeter.