REDUCING THE CUSTOMER CHURN

Customer churn falls when Resellers sell additional IT services that close the technology loop for their clients. Instead of just refreshing appliances every five years, Gigabit’s channel can service the ongoing management needs of a client’s entire IT environment by partnering with a Managed Service Provider (MSP). Managed services are high-margin sales that require little ongoing attention from the VAR.

Partnering with the correct MSP enables Gigabit to service their clients’ needs for testing network performance, monitoring firewalls, managing hybrid cloud infrastructure, migrating applications to the cloud, outsourcing help desk functions and so forth. Once in place, MSP solutions are more difficult for a competitor to displace due to the consultative nature of the sale. It helps that these more encompassing solutions cannot be priced (or shopped) off a line card. Providing a variety of IT services, either directly or through a partner, cements a Gigabit as a reliable and trusted advisor to its clients.

Improving Cash Flow

Perhaps the greatest long-term benefit to a Gigabit Technology expanding its channel to include connectivity, cloud-based solutions, and managed services is the benefit of residual income. These services are sold on a service contract–typically ranging from 12-60 months with the majority around 36 months in length.

These contracts pay commission to Gigabit every month they are 2018 Business Plan | Gigabit Technology 32 in place, allowing commission payments from multiple simultaneous or overlapping contracts to stack atop one another to build a large monthly residual income. The Rule of 78s influences the compounding growth of residual income. For example: if a Gigabit sells services that pay $10,000 in monthly residual commission, and they repeat this performance every month for one year, at the end of one year we would have built a recurring monthly residual income of $780,000.

Retaining Top Talent

Residual revenue models provide stable cash flow that allows for more predictable revenue projections. Likewise, Resellers can leverage residual commission in their compensation plans to retain their top talent by allowing them to continually build a base of recurring commissions.

Migrating from upfront to residual commission model for compensation will require investment from Gigabit leadership to cover traditional upfront commission payments to employees as the company transitions their sales reps to a residual model. At the outset, Resellers may need to pay upfront 10-12 months of residual commission to their reps but will make up the revenue in months 13- 36 of an average contract. Gigabit has already taken these step-through partnerships and the acquisition of the CXO.

Improving Valuation

Many Resellers are owned by Baby Boomers who are anticipating an exit strategy in the next 5-10 years. However, due to the youth of its owners, Gigabit is looking to build a significant residual income base, create strategic relationships with clients, improve their margin structure and diversify their vendor relationships can expect enhanced valuations with a 7-10x trailing 12-months’ EBITDA multiple valuations.

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