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What’s the Magic of Recurring Revenue?

Behind the fairy-tale success of the subscription business model

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Written by: Chelsea Iversen Illustrations by : Zach Waggoner Copyright 2014

In May 2013, Adobe completely abandoned its traditional product suite and perpetual licensing, making the transition to software as a service complete. As a result, Adobe Marketing Cloud revenue skyrocketed to a record $1.02 billion in FY 2013. And, SaaS native Workday, Inc. announced its FY 2014 earnings in February, reporting a 71% year over year growth, and rocked Wall Street in the process. Companies like Adobe and Workday have tapped into something that has made them leaders in the market. Between stock market performance and end of year numbers, its companies like these that are coming out on top. The market doesn’t lie. Recurring revenue businesses are performing better. So, what’s the story behind it? What’s the magic of recurring revenue?

Recurring revenue encourages valuable customer relationships Engage and retain A recurring revenue business model enables better customer retention. Rather than just selling your software and wishing customers luck, subscriptions give you an opportunity to engage with them beyond one-time transactions.

What about business value? Do the math: 12 monthly payments of $100 from a customer are more valuable than a one-time payment of $500. The longer the relationship with a customer, the more monetized value that relationship brings to your business. It’s simple: recurring customers are more valuable to your business.

What about value for the customer? By keeping in touch with your market, staying competitive through product development, pricing appropriately, billing clearly and enabling better customer service, you are adding value your customer relationships. Customers are benefiting from the relationship as much as your revenue stream is benefitting from the relationship. That’s the no-lose scenario that you can only achieve with a recurring revenue business model.

Recurring revenue is predicable Out with the old Generated through monthly, annual, usage-based, user-based, or any conceivable combination of subscriptions, recurring revenue is more predictable than revenue from old-school perpetual licenses. In the old world of software, unpredictable fluctuations made forecasting a challenge and customer retention an uphill climb.

In with reliable rev In today’s world of software, subscriptions rule. With recurring revenue, not only can you improve forecasting for better real-time business decisions, but you can also have more control over churn. Being able to see churn levels is crucial to understanding how to move your business forward successfully. And, with recurring revenue, software companies can rely on a regular revenue stream rather than deal with dramatic ups and downs in revenue with each upgrade. Your expenses are booked upfront, but revenue is continuously being recognized throughout the duration of the subscription.

Customers prefer subscriptions Look at the numbers The press gave Adobe a hard time at first with their big switch to subscriptions in 2012. But the numbers don’t lie: Adobe exited Q4 of FY13 with 1 million 439 thousand paid Creative Cloud subscriptions. Companies of every size are deploying SaaS applications because traditional licenses are too bulky and expensive. And, let’s face it: they’re no longer valuable in the marketplace today.

Disruption is the only way The message is clear: customers want less of a commitment, more convenience, and more relevant and timely product updates to delight them. That means they want subscriptions. It’s time for businesses to get on board before they’re swallowed up by tiny SaaS startups and giants like Adobe with SaaS apps. To succeed today, you have to understand customer needs and be willing to disrupt the traditional business model to meet them.

Subscriptions are better aligned with value Usage is value A subscription business utilizes dynamic, value-based pricing, rather than fixed cost-plus pricing. Recurring revenue is more aligned with usage over time, and customers can subscribe based on how often and in what ways your product is actually being used. So, customers only pay for what they use - driving value for them and giving your business incredible insight into product usage.

No more Shelfware Customer requirements are constantly in flux, and with a perpetual license, they’re stuck with a solution that may no longer add value. So what happens? Your solution sits on the shelf, unused and without value. Upgrades, downgrades, subscription changes and add-ons - all these are valuable to customers who want to maximize the benefits of your solution. Operating as a recurring revenue business is the only way to offer the flexibility that customers need.

Value goes both ways With recurring revenue, subscription status – active, inactive, recently churned, etc. – becomes a more integral part of the business process. This enhances not only the relationship with the customer, but by creating a personalized approach to retention, renewal and upselling. This brings value to the customer and your business in one fell swoop.

Recurring revenue minimizes the risk for the customer A fear of commitment Multi-million dollar software packages are no longer appealing. Committing to purchasing expensive software that is only improved and updated once a year seems ridiculous when there are solutions available for rent - solutions that are continuously improving to meet customer needs.

You can sell better With competitive pricing and flexible options that make subscriptions appealing to customers, you can attract customers through lower initial commitment and at the same time, boost revenue growth. The sales cycle in a subscription model is much shorter and meets much less

Recurring revenue drives continuous innovation Be a leader When you’re running a subscription business, your competitive advantage lies in your ability to be a leader technology innovation. And, unlike in the old world of perpetual licenses, you have the opportunity to make updates to your product at any cadence to stay ahead in your industry.

Listen up The key to capitalizing on this opportunity is to listen to your customers’ needs, and respond quickly. Churn doesn’t lie, and continuous innovation and attention to what customers are asking for can keep your retention high and your business at the forefront of your industry. Luckily, the recurring revenue business model allows you to be more closely aligned with how the customer is using your product and what portions of your product drive value. And, with unprecedented insight into usage and clear version alignment, businesses selling subscription services can provide better technical support to customers.

New levels of innovation Subscriptions enable your developers to make product updates regularly, which benefits both the cutting-edge technical viability of your technology as well as customer satisfaction. How else was Adobe able to add 3D printing to its flagship product in January 2014? Technological innovation in a recurring revenue business model allows you to continuously push the envelope and forge ahead.

It’s magic. Or is it? The magic of recurring revenue is simply the win-win-win result that is disrupting business today. Subscription as a service moves technology forward. It bring valuable products to customers the way they want them. And, it drives revenue for your business. Subscriptions are surpassing perpetual licenses across the board. The growth that today’s SaaS applications are seeing is undeniable. The market doesn’t lie: software businesses today can either succeed by moving to a recurring revenue model or become food for faster, more adaptable competitors.

What’s the Magic of Recurring Revenue?

Behind the fairy-tale success of the subscription business model

Jack short story