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TRASH TO TREASURE: How to rebuild a recurring revenue stream

DesertMicro Builds Upon Recurring Revenue Model

By Jim Molis

Photos by Ken McCray

You may not be able to please all of the people all of the time, but DesertMicro, Inc. has learned to please more customers, more of the time. The Jacksonville-based provider of software for waste management, recycling, and logistics companies has expanded its customer base, and created recurring revenue by selling services based upon its clients’ needs and resources. A Microsoft Certified Partner, DesertMicro offers implementation, data conversion, on-site training, and technical support staff.

Established in 1997, DesertMicro initially wrote route accounting software that allowed businesses to track costs and activities associated with their commercial vehicles, such as trucks for landscaping, HVAC maintenance, and food delivery. Eventually, it developed a niche in serving large waste management and recycling companies across the United States. However, the company’s market was somewhat limited because its software sold for $50,000. “That cost was typically prohibitive for companies with less than 100 vehicles in the field,” President Barry Grahek said.

Seeking to expand its customer base by maintaining the functionality of its software, while lowering its price, DesertMicro took it to the cloud. It rewrote the software in 2005, in the nascent days of cloud computing, so that it could offer it as a web-based subscription model. Moving to the Software as a Service model (SaaS) allowed DesertMicro to sell access to its $50,000 enterprise resource planning solution for a monthly fee that smaller companies could afford. The monthly subscription allows customers to spread out the software’s cost, which can improve cash flow and budgeting. “The customer gained a much more reasonable entry cost, and we gained five to six times the customer marketplace that we had previously,” Grahek said.

DesertMicro now serves companies with five vehicles to more than 4,500 vehicles. Its software package, The Manager, provides comprehensive, integrated waste management and transportation logistics solutions, including for routing, processing, and GPS. Clients can use this software to better run their businesses by using individual modules or groups. For example, customers use DesertMicro’s software to optimize delivery routes, monitor vehicle performance, and identify inefficiencies, like if vehicles are left idling too long.

“Our customers can now choose the most economic module for them,” Grahek said. A smaller company that may not need to file paperwork with the Department of Transportation doesn’t pay for that service, while a larger customer that would benefit from software that facilitates compliance may pay more each month for that capability. Customers pay for only what they need and want, and grow into other modules.

According to Grahek, residual recurring revenue, generated by thousands of customers paying to use the company’s software modules, now accounts for more than 60 percent of DesertMicro’s sales. Overall, annual revenue has increased at an average of 18 percent for the past five years, with sales to existing customers averaging a 22 percent increase. “As customers buy more vehicles to put in the field, they need more software and users,” he added.

Grahek expects to maintain steady growth due to the gradual improvement in the economy. “As our customers scale up, we can scale up with them,” he said. And DesertMicro can scale up quickly, without adding employees in advance of growth, but capitalizing on the increased demand as it arises. “It has been a tremendous amount of growth to adapt to,” Grahek noted.

That may be most pleasing of all.

 

Customer Feedback

DesertMicro offers customers its Software as a Service (SaaS), as well as a traditional model for purchasing and maintaining software. The company works closely with customers on installation and training. Industries DesertMicro serves include waste management, hazardous waste, medical waste, paper and plastic recycling, oil and solvent recycling, concrete and construction, electronic and eWaste, propane and heating oil, and petroleum distribution. The following comments from customers are from DesertMicro’s website:

“For the past five years we have been happy with the performance of [DesertMicro’s] product and have recommended it to fellow haulers… Our customers love the online invoicing and bill pay option,” Ray Scott, Price Environmental Services.

“I feel more confident using RouteManager, and if my computer crashes, I know my data is backed up properly,” Stacy Engebretson, Engebretson & Sons Disposal.

Numbers Worth Watching

DesertMicro tracks the following closely:

  • New-customer sign-ons
  • Existing customers increasing their sign-ons
  • Customer attrition

 

Fingers On The Pulse

Before it offered its Software as a Service (SaaS), DesertMicro could not tell how a customer was using its software, or even if a company stopped using it all together. For example, a company may have been sold and thus would not pay for more software. With SaaS, DesertMicro tracks usage so that it can proactively work with customers to adapt to their current needs. “Those metrics of the whole customer lifecycle are much more visible to us,” President Barry Grahek said.

If a company is paying for a service it is not using, DesertMicro will determine if the customer does not need the capability, or if they are not using it properly. If it’s the former, DesertMicro can make adjustments so the customer does not pay for unneeded services. If it’s the latter, it can train the customer to obtain full use of its software. Either way, the customer is less likely to stop subscribing all together. “We protect that revenue stream,” Grahek said. “If they’re not using it, it’s not likely that they will continue with that portion.”

DesertMicro strives to maximize utilization among customers by monitoring the modules that they are accessing. If, for example, its data shows that multiple customers are underutilizing a module, they may offer a free training webinar for user groups. If the underutilization is confined to a single company, it will help them determine their vision for the software, and identify training needs that will make them more effective. “The macro data guides our strategic vision, and the micro usage data guides our tactical decisions with that customer,” Grahek said. Helping customers use their software properly, so as to fulfill their needs, strengthens the relationship thereby creating recurring revenue.

 

How You Can Do It

DesertMicro still sells software in a traditional model, where a customer purchases and maintains all software, databases, hardware, and services onsite. But its subscription-based Software as a Service (SaaS) is increasingly popular.

Administered and hosted by DesertMicro, SaaS provides customers access to comprehensive and tightly integrated DesertMicro solutions–without the worries of technology and infrastructure maintenance, or hardware and software costs.

Customers have embraced the convenience and flexibility that SaaS offers. “We have simple, easy to use, almost self-taught route accounting software now,” President Barry Grahek said.

DesertMicro, in turn, has generated recurring revenue from monthly subscription fees. “The key to any service company or technology company is to transition into that residual revenue stream like we have,” Grahek said. Companies can do so by determining the lifetime value of their product or service and replacing it at that time, while continuing the residual. For example, companies can sell phone systems or copiers on a residual basis, updating the product at the end of its lifecycle. “They’ll get a closer, longer relationship with their customer because they have more contact with them over a longer period of time, and will generate more revenue in the process,” Grahek said.

“Though it might be easier for technology companies to create recurring revenue models due to the nature of their products and services, other types of businesses can do so, as well,” Grahek said. “Any company has an opportunity to create residual income just by looking at their longest customer relationships, understanding what those customers purchase from them, and turning that from individual purchases into continual monthly purchases and services. Doing so also helps customers budget because they have predictable costs,” Grahek added.

Grahek cautions companies who are considering converting to a monthly model to set realistic expectations. “A new customer may have lower profit margins at the beginning, but price it out so that, over a three to five year cycle, the gross margins achieve the target goals.” DesertMicro’s software has an average lifecycle of seven to eight years, so it works with customers to project their needs and deliver solutions that extend into another cycle, thereby extending its relationship and increasing its residual income.

Photos by Ken McCray

By Jim Molis

Jim Molis is a contributing writer for Advantage Business Magazine.

He can be contacted at jmolis@creatwoodpr.com

 


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