‘Bad Revenue’: Selling Too Much Product Can Hurt Valuation
There is a large industry shift occurring that is moving revenue from transactional to services-led, which isn’t too shocking, said Skelley. However, the rate and pace of this change is now accelerating faster than ever which can affect the valuation of a solution provider.
Although product sales drive revenues and create cash flow and funding to invest further in services, having too much product sales can hurt the valuation of a company. For example, one solution provider told the story of how a private equity firm warned his company that taking a multi-million product order would negatively impact the partner’s recurring revenue mix.
“A solution provider said, ‘If we get below 80 percent services, our private equity people will sit there and complain about a $3 million order because it shifts our revenue mix from 80 percent to 78 percent,’” said Skelley. “It’s a strange conversation to be having that there’s such a thing as bad revenue. So when you talk from a valuation standpoint, that topic can come up. Services are the main margin differentiator for them.”
Skelley said solution providers are looking to increase their percentage of services-led revenue as part of their overall revenue “because that drives valuation.” Blending professional services with services that are recurring, at scale, is the secret sauce, he said.