Seven Reasons Why Revenue Operations is Fundamental to Crossing the Chasm to A Recurring Revenue Model
An organization’s ability to grow revenues has become more tied to firm value than at any time in our business lives. This relationship can be seen in the high valuations awarded to businesses that can deliver predictable, scalable, and profitable growth. In particular, a business with recurring revenues is worth more than one that must sell their offerings to their customers one at a time repeatedly. The average mature SaaS business grows at 19% which supports double-digit earnings multiples and stable cash flow while covering large, fixed costs. According to the Subscription Economy Index (SEI) report by Zuora, the leading cloud-based subscription management platform provider, subscription businesses in the index have outpaced S&P 500 growth rates by 4.6x over the past decade. For example, Salesforce.com – a SaaS business with double-digit growth rates and recurring revenue streams – has a price to earnings valuation that is triple the S&P 500 average.
So it’s no surprise that most (53%) of boards are pushing their CEOs to repackage their products and services as subscription pricing models, usage-based models, or cloud-based offerings, according to a report by CFO Magazine. Almost every (90%) business that sells “on premises” technology, equipment or software is moving to a cloud model according to Gartner. Any business that can pull it off – including industrial firms like Honeywell, automotive firms like Audi, hardware firms like Avaya, and infrastructure like Flexential – is trying to move to recurring revenues.
The problem is moving to a subscription model is not as simple as it sounds. Fully mature SaaS businesses are far more valuable than their peers. But cash flow, profitability, go-to-market operations, and revenue forecasts can be significantly impacted during the transition from selling using the traditional “pay per product” basis and a subscription model. Moving into the subscription economy forces organizations to rethink and redefine the science of growth – from the “4Ps” of marketing, to the incentives and quotas in sales, forecasts generated by finance, the leadership of revenue teams, and the technologies that enable the entire lead-to-cash cycle. This is a big reason why business model transformation is the top reason organizations are moving to a revenue operations model, according to research in the book Revenue Operations, a New Way to Align Sales and Marketing, Monetize Data and Ignite Growth.
In all there are seven ways businesses are going to have to transform their commercial models if they expect to participate profitably in the subscription economy.
1. Redefining the “4Ps” of marketing – pricing, packaging, promotion and placement. Moving to a subscription model fundamentally redefines the traditional “4Ps” of marketing, pricing products, packaging them, promoting them (e.g. by free to fee models), and placement (delivery). This places a premium on revenue enhancement activities like algorithmic pricing, value selling, personalization and pricing discipline. It also means optimizing an almost infinite number of pricing variables – that mix usage, users, service levels, and use cases. For example, enforcing pricing discipline and dynamically optimizing price to value and market demand can add 10 percentage points of profit to your bottom line with no incremental resources or investment. A 1% increase in effective price with no commensurate volume loss will add 10% to your bottom line profits according to Professors Jagmohan Ragu and John Zhang at the Wharton School of Business.
3. Making growth leadership accountable for all commercial and customer facing functions. A recurring revenue model is a team sport. Product, sales, marketing, success and service must all work together to realize the full revenue potential of a client through value management, pricing optimization and highly coordinated account expansion activities. This blurs the lines across traditional stovepipe functions. It forces CEOs to put in place more coordinated leadership structures that better align marketing, product sales and success around the customer with greater accountability for the entire revenue cycle. As evidence, 85% of organizations are changing the way they lead and align revenue teams and the operations that support them according to research in the book Revenue Operations. For example, the pressure to accelerate annual recurring revenues to drive business model transformation at Avaya led their CEO, Jim Chirico, to move all of the customer facing functions away from the geographies and consolidate their reporting structure to a single growth leader. “One of the things we did to make our revenue team more successful was to bring in a Chief Revenue Officer (CRO) to create a single point of authority over that entire go-to-market organization on a global scale…. accountable for marketing, sales, delivery, customer success, professional services, and all the channel partners that support our organization.”
4. Redefining performance metrics and incentives to better quantify and define customer lifetime value. As organizations transition from selling tangible goods to subscriptions, their leaders will be forced to redefine the incentives and measurements that motivate their revenue teams to better reflect how revenue is generated in a recurring model. Moving to a subscription model immediately makes customer lifetime value, ARR and Net Recurring Revenues the dominant metrics for all go-to-market functions. “An important aspect of getting sales, marketing, services, and customer success to work as one revenue team was to align incentives around a common set of strategic growth goals,” reports Jim Chirico, of Avaya. “Aligning our incentives and KPIs with our overall objectives is extremely important to achieving our growth goals, especially as we move from a product company to a SaaS / cloud company.”
5. Reengineering and enabling the entire lead-to-cash cycle. Converting leads into cash flow in a recurring revenue model requires a much tighter set of information and coordinated set of motions all along the revenue cycle – including demand generation, opportunity development, value selling as well as customer retention and expansion. “The consumption phase of the revenue cycle is particularly important because that is where value and revenue are realized,” says Serentelos. “Client onboarding, set up, education, training, adoption, service resolution and ultimately cross sell, upsell and retention are all critical and discrete steps that determine revenue performance and profitability. While sales may “book” a transaction in a traditional sale, it is increasingly the customer service and success teams that manage the bulk of this post transaction engagement data in a recurring revenue model. This means managing operational forecasting in a recurring revenue model requires more information sharing and coordination across the revenue team – including actions by marketing, sales, operations, and finance throughout the customer lifecycle.” This is forcing organizations to rethink and reengineer how they manage their lead-to-cash cycle. “All of our customers are going through transformations in the way they sell, price, and bill,” says Robbie Traube. “Some are born and bred on the cloud. Others are traditional businesses that are transforming some or all of their revenues to a recurring model. Sometimes that means helping them walk before they can run in terms of enabling the configuration, pricing and billing of their offerings – and recognizing and forecasting revenues and cash flow.” “Often our customers are going through complete business transformations in the way they sell, price, and bill,” says Robbie Traube. “Some are born and bred on the cloud. Others are traditional businesses that are transforming some or all of their revenues to a recurring model. Sometimes that means helping them walk before they can run in terms of enabling the configuration, pricing and billing of their offerings – and recognizing and forecasting revenues and cash flow.”
6. Managing the customer experience across the entire revenue cycle. Moving to a recurring revenue model forces organizations to manage the entire revenue cycle – from demand generation through purchase, consumption, renewal and expansion – as one coherent motion. This flies in the face of the fractured way most organizations are organized, where marketing generates demand, sales drives the purchase, and a rapidly maturing customer service and success function managing the lion’s share of customer engagement and value creation. This uncoordinated management of the revenue cycle leads to revenue and margin leaking through “air gaps” and handoffs in the customer journey. Organizations can leak ten percentage points of EBITDA (profit after taxes, depreciation, and interest) by failing to follow up on opportunities, enforce pricing discipline, respond to buying signals, or recognize when customers are about to take their business elsewhere. In response, RevOps leaders are connecting the operations, systems and data sets that support these functions to create a better picture of the entire customer journey to enable one-to-one personalization, guidance, and expansion campaigns at scale. For example, Zuora recently acquired and integrated their revenue, billing, and collections solutions with a subscription experience platform – Zephr. This expanded product capability helps business leaders to better understand the relationship between customer behaviors and revenues and experiment with different digital offerings and experiences. This allows them to actively improve customer lifetime value by actively nurturing and monetizing their subscriber relationships with personalized subscription experiences.
7. Reallocating growth resources, effort, and investment along the revenue cycle. Moving from selling products to selling subscriptions and SaaS solutions requires significant changes to the way you “go-to-market”. It shifts the focus of selling from hunting for new customers to building more loyal customers and expanding their relationships with them. Re-focusing revenue teams away from acquiring new accounts to maximizing their lifetime value forces sales leaders to rearchitect their focus, quotas, goals, treatment models and incentives. As a consequence, over 90% of growth leaders are actively reconfiguring the roles, assignments, and incentives and priorities according to the book Revenue Operations. Moving to a recurring revenue model also transforms the marketing mix and forces the reallocation of growth operating budgets and capital investment across the revenue cycle. Marketing must shift resources to retention marketing, client education, and engagement with users through “owned channels” such as invoices to chatbots, service centers, and customer service portals. Marketing and sales must coordinate with success teams on programs such as Account Based Marketing, value enablement and cross sell programs that are focused on account expansion.
You can learn more about the ways you can accelerate your transition to a recurring revenue model by attending an upcoming executive panel on “Revenue Operations: A System for Scalable and Consistent Growth” on September 28th, 2022 at 11am EST. All participants in the session will receive a complimentary copy of the best-selling new book Revenue Operations. You can register for the executive panel here.