How To Get The Financials Right For The Recurring Revenue Model
With an extensive background in business and finance, Subscription Factory Owner, Partner and Senior Business Consultant, Alexander Demes has covered almost every financial aspect and role, from revenue and taxation to director of finance.
Combining his financial experience with his deep passion for IT, building Subscription Factory services around the Zuora platform made total sense. Alex could see the business benefits and potential applications of the recurring revenue straight away.
So what exactly are the financial advantages of the subscription model? In this post, Alexander shares his first-hand industry insight into the recurring revenue model from a financial perspective.
What is Zuora?
Zuora is a monetization platform which provides software solutions for businesses looking to launch and manage subscription-based business models. The software facilitates recurring billing and collection, alongside quoting, revenue recognition, and subscription.
Subscription Factory is a best-in-class Zuora specialist which provides a range of services from process design and subscription consultancy to system integration and subscription accountancy.
Which type of companies use the subscription model?
The subscription model isn’t necessarily right for every type of business, but it does attract a broad range of companies at various stages of growth and maturity.
Firstly, it appeals to start-ups looking to build an entire enterprise from scratch, basing their business around subscriptions from the get-go. They might have 100 or so customers and clear plans for growth. For that reason, these companies are usually focussed on acquiring new customers. Usually, but not always, they’re software companies seeking an alternative to the licence model.
Second stage businesses, those with a thousand or more customers, tend to have an existing subscription model, but they want to change their existing set-up in-line with other changes, such as a new product catalogue. These are more complex cases because there’s legacy software to contend with. Working with Zuora, requires some adjustment to a different way of working, and education is the key to making a smooth transition.
Thirdly, there are a growing number of well-established companies looking to transition from a previous business model, such as selling software licences or physical products like disposable razors. These companies are re-inventors with a long history, and typically their longevity is down to innovation. They know they need to change, they’re willing to change at C-suite and marketing levels, but they’re not always ready at a financial level.
The growth and learning stage
Many companies which choose the subscription model take an upside-down approach to implementation.
Although larger organizations are able to leverage specific financial knowledge from within, it can take expert guidance to help them see the bigger picture and the wider impact of implementation. The team at Subscription Factory can help to bring everything together.
For many established businesses, the recurring revenue model is something new, and represents modernization, and a shift away from a previous model. Customers generally arrive at Subscription Factory in one of two situations:
- They have already begun the journey towards a subscription model, but they need expert guidance to successfully continue.
- They have detailed plans and a clear strategy for moving to a subscription model, but do not have the technical expertise or experience to implement it.
Financial readiness for the subscription model
For established companies, financial readiness for the transition to a subscription model can be complicated by their existing business model, typically built around a single purchase customer, large revenue, and complex legacy infrastructure.
Switching to a subscription model is a huge change which requires the exchange of large, short term injections of income for regular, repeating, and smaller instalments. From your customers’ perspective, this also has financial implications, because your product or service moves from a capital expense (capex) to an operating expense (opex).
Especially for companies reinventing their business model, it can be difficult to make this step because of the initial revenue gap between single purchases (such as licence-based products) and the recurring revenue model. It’s understandable that at this uncertain point in time, many companies get cold feet.
Finance departments are typically last to get onboard with recurring revenue streams. That’s because of the short term dip in the revenue as the company makes the transition.
But when the transition to a subscription model is handled correctly, this period of financial uncertainty in the short term, it is replaced by more consistent and predictable revenue certainty in the long term. The subscription model also negates the problems associated with persuading customers to renew a long term licence agreement.
Getting everyone onboard with recurring revenue
The shift to a subscription model often begins in the C-suite, and to make it a success, it requires a real commitment. This means making an investment in educating the rest of the business on the value of recurring revenue.
Not only that, the subscription model can help you regain clarity over your customer-base and renew a direct relationship between your business and its customers – particularly if you have a physical product which reaches them via stores or other third-party distributors.
For B2B companies, one of the challenges can be to incentivize sales teams who are used to selling a one-off product or service with a large upfront price tag, as opposed to smaller, more frequent payments over a longer period of time. Using the more traditional approach, the sale is stuck at an agreed amount. With subscription businesses, there’s greater opportunity to upsell add-ons.
Implementation of Zuora touches upon many areas of business and finance, with a deep and lasting impact in terms of pricing, billing, taxation, and revenue recognition. When you switch to a subscription-based model, your entire business model changes, and everything starts with Zuora. That’s why it’s important to get the right partner onboard to smooth the transition and give the complete overview, not just separate pieces of the puzzle.
Whether you go all in or dedicate a recurring revenue model to a particular product segment, businesses everywhere need to adapt to the subscription model. The financial and business benefits are simple: with the right implementation and less effort, you can have lower churn, and make the process of renewal less of an event, creating stable income over a prolonged period of time.
It’s the new way.