Webinar Video: Recurring Revenue Management: Billing to Retention Best Practices
This webinar focused on current and emerging trends in the technology available to ease the enormous challenges posed in running a business within the context of a recurring revenue model. Are you a Software as a Service or subscription-based business? Do you take recurring payments from customers? Are your current contract management and
This recurring revenue webinar video is from the Proformative webinar "Recurring Revenue Management" held on September 12, 2012. The webinar features a presentation from Kim Odom, Director of Vertical Marketing,
Recurring Revenue Webinar
Thanks, John, it's great to be here this morning. Welcome everyone to today's webinar. I'm excited to be speaking to you today about the topic of Recurring Revenue Management. It's a model that I am very, I'd say, intimately familiar with throughout my
I've managed P&L responsibility as well as go to market execution. At all these companies the one thing in common is they were pretty much 100% based on the recurring revenue model. That's what I am responsible for; all of our marketing efforts, targeting the software industry. This is an industry where recurring revenue is quickly becoming the primary business model, certainly for any new software companies that's coming to market, but you also see a lot of legacy software companies adopting this model, as well. But, as you'll see, as we to through this presentation, what I refer to as the subscription model is actually becoming the de facto approach for industries beyond just software and high tech.
I'd like to start with a key data point from a recent Gartner research report. Keep in mind that this research is focused on Global 2000 companies and the estimate is that in the very near future 35% of these organizations, and these are the largest, most traditional enterprises, will be generating revenue through a subscription-based revenue model. That's more than one-third of the Global 2000. And many of the companies on this list actually did not start out in the recurring revenue business plan.
If you follow the software industry, you are already aware of strong companies that have been built on a recurring revenue model. Companies such a Salesforce.com, Eloqua and, of course, NetSuite. I'm sure you've also noticed recent moves by both
So while the research on the previous slide might surprise you that the worlds most largest companies and industries are shifting towards this approach, this quote here from IDC illustrates that within some verticals, the shifts actually began quite some time ago. And the subscription model is now basically a new norm for mainstream.
Nowhere is this more apparent than in the hi-tech and telecommunications industries. Specifically looking at the software industry. IDC found that this year more than 80% of new software products that are coming into the market place are being provided as a service rather than as a traditional package product with a professional license attached to it.
When you look across the software market landscape, all the disruptive innovators today, companies like Box, Yammer, Hubspot, Eloqua, Bizzar, Good Data. You'll recognize that the subscription business model is really gaining momentum in B2B markets. These are companies that have built their businesses to take advantage of the shift, and the market has rewarded them.
But this shift from
Of course, we're all familiar with how the subscription model has turned the video, entertainment and music industries on their ears. Companies like Netflicks, Hulu, Pandora, and Rhapsody have been instilled as the new guard. But let's take a look at a very old school industry. The automotive industry.
They are not immune to this shift either. Car sharing subscription services, such as Zipcar are no longer on the fringe. There are a number of factors at play, but the rapid growth of car sharing is actually being fueled by younger drivers who have a fundamentally different perception about what it means to own a car and what it means to have your different transportation models. They actually view a car as a utility not as a possession or a status symbol. So for them subscribing to a service to meet their transportation needs makes a lot of sense.
Even the method by which many of us choose to put food on our plate is now achieved via subscription. CSAs, which stand for Community Supportive Agriculture, can be found across the country and there's a big movement with consumers now to take this approach to buying everything from produce, eggs, jam, meat, other items that would have traditionally been purchased one time at a supermarket.
Of course, when you look at some of these logos next to the RIP on the slide I am being a little bit facetious. I mean Zipcar is probably not going to cause Ford to go out of business. But the point is that this is a big shift in purchasing for both consumers and businesses away from the one time model into a recurring model. This shift is having a profound impact on all the industries that I've listed here, and many more.
Before I go further I'd like to take some time to make sure that everybody understands some of the key differences between the one time and recurring business models. In a recurring model the booking it's supposed to be getting whereas it represents everything in a one-time model. The next area of difference is what you can learn by examining the P&L.
At traditional software company where all of the licensed revenue is recognized immediately on the booking everything the sales organization did in a quarter, it shows up in the P&L. If someone wants to understand sales productivity or the rate of booking growth all they have to do is take a look at the P&L.
Unlike the old model, the quarterly P&L at a recurring revenue company doesn't reflect end quarter performance. In a subscription model, your quarterly P&L represents the overall long-term performance of the business. Every quarter reflects the culmination of everything that's been accomplished up until that point, every contract signed, as well as every customer you retained or lost.
This is important because it means the P&L provides insights into some of the fundamentals of the business. If the gross margin on recurring revenue is low, then there's a fundamental problem with the architecture perhaps, or delivering pricing might be something that's difficult.
These could be expensive problems to fix and will require a big focus to overcome. Instead of the key leading indicator about the quarters revenue being a gut check on the sales team, it's a deferred revenue waterfall. Ultimately, this means the critical success factor for a subscription based business is to build, retain and grow the recurring revenue stream.
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The hockey stick at the end of the quarter is no longer the key factor in understanding short-term results. Building a larger and larger recurring revenue base will be reflected instead in steady increases in quarterly P&L.
One of the main benefits of recurring revenue model is that it's more predictable, assuming, of course, that you are focused on and executing on the right things. We'll get to more of that as we move into the best practices.
So, first in our Recurring Revenue Webinar, I just want to talk about some of the new metrics that are used when you talk about a recurring revenue model. Now these are going to be very, very different than what you would see in a traditional model, so I'm just going to touch on a few off these.
ARR, which is annualized revenue, or annual recurring revenue, this now becomes a very, very key metric, and some companies even focus more heavily on MRR, which is monthly recurring revenue.
Then we have gross sales and marketing efficiency. This is basically saying for every dollar of S&M that I'm spending, what impact is that on the current period's bookings? Then you could take that a step further by looking at sales and marketing revenue efficiency. That is answering the question for every dollar of S&M that I spent, how much revenue is that getting me? Revenue in this model is very different than bookings because there's a deferred revenue model, deferred revenue waterfall.
Then the adaption rate; these are for anyone that's offering premium model or free trials. The adoption rate of something that's very, very key. This is the percentage of people who are signing up for your product or service that actually convert to users. This is a very, very critical metric in the recurring revenue model.
So now that we've laid the ground work for this model, let's move on to discuss some of the top challenges that this model represents. As I mentioned on the previous slide, there's a lot of complexity in a recurring revenue business. More moving parts if you will.
At the center of most recurring revenue business models is the subscription itself. Subscriptions can have multiple options for term, and frequency. Annual and monthly are the two most popular, but it's also fairly common to see quarterly or even
For many companies, in addition to the subscription, there are additional components that are usage based. For example, an email marketing software company might have a package that includes of a fixed number of emails for each month with the option to purchase additional emails as needed. The number of emails is a usage component that needs to be taken into account along with the base subscription.
Sticking with our software company example, if they deliver some portion of their product through a traditional perpetual licensing mode, then that has to be handled properly, as well. And if there's a . . ."
End partial: Recurring Revenue Webinar