5.21.19 – CEPro – Joseph Kolchinsky
The big-box retailer’s turnaround is rooted in retooling the customer experience. Companies serving higher-end clientele can take cues from how Best Buy created 15x multiple on tech support recurring revenue.
Question: The CEO of which company said the following: “Now is the time to play offense. Our customers are noticing the improved experience … [We used to be] focused on selling products. Now we are selling experience … We think the longterm reward to building this relationship and the solution is very exciting.” Apple? Walmart? Amazon? Ford?
Answer: None of the above. It was Hubert Joly, the CEO of Best Buy — the big-box retailer known for selling DIY products.
Perhaps most surprisingly, this wasn’t some random quote taken out of context. Nor was it a platitude used as a marketing ploy to get customers.
In fact, Joly’s quote about the shift from focusing on products to the client experience neatly sums up an entire strategic mindset as shared by the CEO and his management team during their recent Q4 earnings call.
Best Buy’s call was well received by investors, resulting in an immediate increase of roughly 15 percent to its share price. However, the picture has not always been so bright for Best Buy. Following the bankruptcies of similar companies such as Circuit City and Tweeter, Best Buy has been fighting for its life over the past decade or so.
Its turnaround has been a remarkable story of innovation and foresight, and the Q4 earnings call was true to form. I listened to the entire call and dug deep into the subsequent press release. Best Buy’s strategy is full of powerful lessons you can use to shape the long-term outlook and subsequent strategy for your custom integration business.
Best Buy’s 2020 Strategy Signals Change
In 2012, Best Buy was a failing business and hit its lowest market value since before the dot-com boom. Even five years later, sales were declining and margins were shrinking.
While Best Buy was doing better, it hadn’t totally figured out how to go from being “the place you go to preview your Amazon purchases” to becoming economically relevant again.
In 2017 company leadership regrouped, came up with a strategy to turn things around, and held an investor day where they announced their plans — Best Buy 2020: Building the New Blue.
This quote summarizes the strategy well: “Best Buy is evolving how it sells to focus not on just selling products but solving customers’ underlying needs. The company will seek to accelerate its growth by continuing to improve the customer experience within and across channels, more effectively addressing customer needs in underpenetrated categories and building its in-home channel.”
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Let’s translate that. Best Buy recognizes that providing the technology itself is no longer sufficient. The consumer needs a professional to help implement the technology successfully. Best Buy believes that it can grow its revenue/profits by improving the service experience and charging for it.
The company recognizes that its customers aren’t taking advantage of all that technology has to offer. By more effectively engaging with the customer it can persuade said customer to make more purchases.
In other words, back in 2017, Best Buy accepted it had an outdated business model. It also realized there was an opportunity to improve the customer service experience and drive significant growth across the business.
Integrators can learn a lot from Best Buy’s strategy, which leverages in-home tech advisors and tech support memberships. After all, Best Buy (and its premium Magnolia operation) is a lot like many integrators — only much bigger.
In-Home Tech Advisors Get Proactive
In the past year, Best Buy provided 175,000 in-home consults via 400 advisors. That’s about two in-home visits per advisor per day.
Here’s what Joly said about the program: “Both employees and customers love it, the Net Promoter Score is high, and the advisor employee turnover is low … The revenue per order that we generate from these interactions continues to be much higher … and it tends to have a higher gross profit rate as well.”
This is truly proactive service — and it’s working. At OneVision, we see the same effect with our Tech Reviews; these are proactive, in-home visits designed to ensure clients are getting the most from their technology.
When Tech Reviews are performed properly, they lead to substantial new sales. But a Tech Review is not just about maintenance and upgrades, it’s about strengthening the relationship and hammering home the value of having a technology professional in your customer’s life.
Focus on improving the client’s experience with technology by identifying the tech areas that need fixing, training or upgrading to reach full potential. In this way, you become a critical and indispensable part of the client’s life.
Consider this comment by Joly: “We like the continued rate of technology innovation and the capabilities technology can bring to people’s lives. We like our opportunity to offer customers a more consultative approach to truly address their needs, provide them an increasing range of services and solutions, expand our relationship with them and become a bigger part of their lives.”
Joly gets it — the “more consultative approach” is precisely what the consumer needs to make sense of this ever-increasingly complex technology world.
Crunching the Numbers for Total Tech Support Memberships
In the past 10 months (at press time), Best Buy had sold more than 1 million Total Tech Support memberships across 1,220 stores. These memberships include unlimited phone, online, and in-store support.
The low membership price, which at $199.99 annually works out to about $17 per month, is due to two primary factors: low client utilization (frequency of support requests) and scale (low labor costs, high efficiency, labor specialization, etc.).
Some simple math reveals that Best Buy is converting around 82 memberships per store per month. If you assume about 500 customers per day or 15,000 per month, then you’re looking at about a 0.5 percent conversion rate.
On the surface that’s incredibly low, but without understanding Best Buy’s customer demographics or sales process it’s hard to know if this is a good number of not. Either way, Best Buy has developed an engine for signing up customers and is now focused on optimizing it.
The key is going to be driving high annual renewal rates. It will take another few months to really know how Best Buy is faring with this program.
Related: Best Buy Hits 1M Subscribers for $199 Total Tech Support Program
When an analyst asked about this, Joly was quick to explain the ongoing investment in service to ensure the long-term value proposition to members would continue to grow: “… we are going to continue to invest in the development of the customer experience, in order precisely to build these stickier customer relationships. So I’ve talked about more self-service capabilities, also more proactive support.
“So for example, to proactively tell you that your firmware needs to be upgraded or that maybe you have opportunities to clean up your computer to get back to that speed that you had initially, or maybe advice around parental control and security.”
This type of innovation requires incredible scale and specialization around the ongoing service offering and the technology that drives it. To deliver on this experience, integrators need a more predictable environment.
The technology deployed needs to become more standardized and reliable (consider the likes of Control4 and SnapAV to help in that regard). And the processes to deploy this technology need to become more efficient (think Portal, D-Tools, OneVision).
The question is whether integrators will start to partner and appropriately take advantage of relationships with trusted and dedicated channel vendors like these.
Building Value From New Business Model
When Best Buy announced all of this along with Q4 earnings, Wall Street reacted by increasing Best Buy’s market cap (its company value) by over 15 percent ($3 billion dollars).
This is particularly interesting when you consider that Best Buy had seen its market cap decrease following each of its last three earnings releases despite beating earnings expectations all three times. Many analyst reports point to Best Buy’s success with Total Tech Support as the driving factor that led an increase in valuation.
Disclaimer: The math and analysis below is extremely basic and Wall Street valuations are never this straightforward. I’m using it as a starting point and expect that over time, as Best Buy continues to release data, analysts write reports, and investors buy/sell the stock, we will get to an accurate understanding of the value of tech support recurring revenue.
For simplicity of math, let’s assume that 100 percent of the increase was due to the progress of the Total Tech Support membership program. That means that $3 billion of value was created by adding 1 million memberships at $200 per year.
What is one tech membership worth to investors? Let’s calculate it as $3 billion / 1 million memberships = $3,000 per membership; then $3,000 per membership / $200 annual membership fee = 15x multiple on annual recurring revenue (ARR).
Back in 2016 CE Pro wrote an article validating security contract multiples at roughly 2.5x annual recurring revenue, or less than 20 percent of what the market appears to be valuing tech support contracts. And this makes sense; security contracts haven’t had much growth opportunity beyond the value of the agreement, but tech support contracts today are just the tip of the iceberg.
As Joly said, Best Buy plans to add value to the Total Tech Support memberships and as a result will likely increase the revenue that comes in from each customer, either by garnering more sales through more touchpoints or raising the price of the membership.
What does this mean for integrators? Let’s do a little more math.
At OneVision, the average membership fee across our partner base sells for $100 per month per home. The structure of OneVision memberships is very similar (though the target client profile and quality of service are very different) to what Best Buy is offering.
According to our data, the average integrator with more than five employees has 100 active clients in its database and does seven projects per month. Additionally, our work for the past three years has proven that at least 70 percent of clients are willing to pay a monthly fee for remote tech support (and other ongoing services).
Combine these two data points and you can reasonably assume that an enterprising, forward-thinking integrator who embraces this new business model (starting now) will have about 350 memberships in five years: take 70 percent of the active 100 clients plus 70 percent of the next 420 new clients over five years = 350 memberships.
Now use this data to calculate the value of today’s recurring revenue: 350 memberships x $100 x 12 months = $420,000 in ARR; and 420,000 x 15x multiple = $6,300,000 in equity value. And that’s assuming today’s membership doesn’t increase in value over the next five years as additional services (e.g. computer support) are introduced to the client.
Over $1M in high-margin revenue and over $6M in value creation over five years. All while streamlining your business and delivering more value to your clients — wow!
It’s Straightforward, But Not Easy
The writing is on the wall: Service is the future of our industry. And major companies in the marketplace are proving it. But how do we get from here to there?
Our industry has an incredible foundation. We have local brand presence with the design/build trade; we have a high-quality and home-grown labor force with hard-to-replace skills; we have knowledge and experience; we have an existing customer base that trusts us implicitly with managing its technology; and we have an enviable flow of high-net-worth customers who are willing to spend massive amounts of discretionary income to add technology to their lives and homes.
These same clients pay a premium for the best service experiences in every other aspect of their lives but aren’t given that option in our industry.
What we don’t have — yet — is a sustainable, scalable and profitable operating model for our service departments, despite service being the number one issue we hear that integrators are having with their companies today.
While most companies will say they have great service, very few have a repeatable and predictable service-delivery model that generates out of high-value, long-term relationships.
Other parallel industries have figured this out. The vast majority of successful security integrators partner with larger companies to handle their monitoring. The vast majority of successful MSPs partner with larger companies to handle support and remote management of devices. Integrators now have similar choices to standardize.
The concept is straightforward, but it’ll take effort.
Streamline your company’s operations, evolve your business model, and learn to sell your value. Those who choose to focus on this opportunity and put the effort in to adapt their business will have a greater probability of not just maintaining but growing their brand dominance in the long term.
This is something that Circuit City failed to do but Best Buy is clearly trying to accomplish. Will you follow suit?