Whatâ€™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 switched from offering a traditional creative product suite to selling on a subscription. Despite having revenue flatten out, their stock price has increased by 57% over the last six months due primarily to the strength of the subscription model. 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. Adobe was a pure play software vendor, and Workday has been a SaaS company from the get go, but both have tapped into something that has made them leaders in their respective markets. Between stock market performance and end of year numbers, it’s 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?
Adobe Marketing Cloud Stock shot up 57% in 6 months
Workday Reporting a 71% year over year growth
Recurring revenue drives valuable customer relationships Engage and retain Subscription businesses cultivate long-term customer relationships. Compared to a traditional business with a one time sale, the recurring revenue business aligns the interest of the consumer and the vendor. A subscripton business is better able to retain a happy customer and create a valuable relationship over time. Rather than just selling your software and wishing customers luck, subscriptions give you an opportunity to engage with them throughout the life of the relationship.
What about value for the customer? Customers benefit because your business is interested in retention, but the differences run far deeper. 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. Thatâ€™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 managing the customer lifecycle an uphill climb.
In with reliable rev In todayâ€™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 they provide more flexibility. Let's face it: even giants like SAP and Oracle are now embracing subscription and SaaS, a sure sign that there is no turning back.
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 disrupted by 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.
Better pricing A subscription business utilizes dynamic, value-based pricing, rather than fixed cost-plus pricing. Customers appreciate pricing that is aligned to the metrics they believe drive value for them.
Subscriptions are better aligned with value Efficient, consumption-based services 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 Big bang IT projects that last several years have become too risky. Every large enterprise has millions of dollars of “shelfware” - expensive enterprise software that was never deployed, or is underdeployed. For most solutions a one year SaaS subscription costs less than an enterprise proof-of-concept.
Alignment of value goes both ways In a recurring revenue business, providing additional value is the way to drive higher ARR (Annual Recurring Revenue). It becomes a more integral part of the business process. The old adage that “it’s easier to sell more to an existing company than it is to get a new one” holds true here. This means enhancing the relationship with the customer, and for most companies, driving a personalized approach to retention, renewal and upselling.
Recurring revenue minimizes the risk for the customer A fear of commitment Old enterprise software applications had to be sold for millions of dollars to support an expensive all-or-nothing sales campaign. Not only are SaaS and subscription a less risky up-front proposition, but they enable your business to continuously improve to meet the broadest needs of customers efficiently.
You can sell better The sales cycle in a subscription model is typically much shorter and meets much less resistance. 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.
Recurring revenue drives continuous innovation Be a leader When you’re running a subscription business, your competitive advantage lies in your ability to lead 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.