10 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 and 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. For example, the marketplace values firms with hyper growth (e.g. annual growth over 40%) and predictable revenues (e.g. Net Annual Recurring Revenues of over 100%) disproportionately.
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. SaaS business like Salesforce.com with double-digit growth rates and recurring revenue streams will have a valuation in excess of 60 times its earnings – more than 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 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 Chris Hummel, author of the new book Revenue Operations, a New Way to Align Sales and Marketing, Monetize Data and Ignite Growth.
In all there are ten ways businesses are going to have to transform their commercial models if they expect to participate profitably in the subscription economy.
Creating a common purpose for the entire revenue team around the customer. Creating a common purpose across the revenue team to grow customer lifetime value is essential to selling in a subscription, SaaS, and recurring revenue model. This is because recurring revenue forces the organization to focus on the customer in a far more meaningful way. Shifting to recurring revenues immediately makes customer lifetime value the top goal of an organizations – changing the incentives, resources allocation, goals, actions and day to day activities of the entire revenue team. This makes growth a team sport. Moving from selling products to selling subscriptions has increased the importance of growing customer equity and lifetime value as a driver of firm value. It has also forced organizations that engage customers – sales, marketing, customer experience and support services – to find ways to work together collectively as one revenue team. Only the CEO has the mandate and span of control to captain the revenue team and effect this level of change on the organization. CEOs are adopting Revenue Operations as a vehicle to create a common purpose by changing the cultures, leadership structures, incentives, go-to-market strategy, sales force design, and communication across their entire organization. 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
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 and renewal – as one coherent motion. This flies in the face of the fractured way most organizations are organized, with marketing leading demand generation, sales leading on purchase, and a rapidly maturing customer service and success function managing the lions share of customer engagement and value creation. Leaders are redefining the operations that support these functions to create a single point of ownership for the entire revenue cycle and “one throat to choke” accountable for the customer experience at any point along the enterprise commercial process. For example, the 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 their biggest customers are about to take their business elsewhere. In response, CEOs are pushing their leadership to unify their operations, revenue teams and assets around a single customer journey and enabling ABM, one-to-one personalization, guidance, and coaching at scale in real time.
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 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.
Visibility into revenues, cash flow and profitability. Businesses transitioning to a SaaS, cloud, or subscription business model which relies on faster growth to transition from transactional to recurring revenue streams without a large short-term profit hit. For example, the average mature SaaS business grows at 19% which supports double-digit earnings multiples and stable cash flow while covering large, fixed costs. Getting there is a different story. This is because while recurring revenue models are inherently more predictable, profitable and valuable – the transition from a traditional “pay per product” model to a subscription model has significant short term impacts on cash flow, profitability and revenue recognition. CFOs must dance a fine line between showing investors ever increasing ARR, while ensuring cash and profits do not take a big hit. This makes it critical to have much better visibility into future cash flow, highly accurate revenue forecasts, and airtight revenue recognition systems. “You can’t do revenue recognition on a spreadsheet in a subscription model,” says Robbie Traube is the Chief Revenue Officer at Zuora, who’s company helps businesses move to the subscription economy. “There many more variables, opportunities for errors, and more frequent changes in usage, plans and options to consider. And they all happen and hit the P&L faster.”
Leadership of all commercial and customer facing functions. Commercial transformation to a recurring revenue model makes selling a team sport. Product, sales, marketing, success and service must all work together to realize the full revenue potential of a client through value selling, pricing optimization and highly coordinated account expansion activities. This blurs the lines across traditional stovepipe functions. Moving to a recurring revenue forces CEOs to put in place more coordinated leadership structures that better align marketing, product sales and success around the customer. This has led to CXOs with expanded remits to manage all of these functions and accountability for the entire revenue cycle.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. Stephen is the accountable party for marketing, sales, delivery, customer success, professional services, and all the channel partners that support our organization. These are hard line reports,” says Chirico.
Rearchitecting the salesforce design and go to market strategy. 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 on maximizing customer lifetime value instead of more functional goals like acquiring new accounts, improving Net Promoter scores – forces them to rearchitect the focus, quotas, goals, treatment models and resource allocation and incentive of sales and marketing teams. CEOs are refocusing their teams on actions and activities that drive ARR and CLV by redefining their go-to-market strategy and sales force design. 90% of organizations are actively reconfiguring the roles, assignments, and incentives and priorities of their revenue teams according to the book Revenue Operations.
Metrics and KPI that quantify and define customer lifetime value. Business model transformation programs like this requires strong leadership from the top to create incentives and structures that align sales, product, marketing, and service delivery teams. Moving to a subscription model immediately makes customer lifetime value the dominant metric and goal of all go to market functions. It is difficult for the leaders of finance, marketing, sales and success operating in silos to agree on the value of a customer. It’s even harder to calculate and quantify this in a reliable and fact-based these managers and their teams will trust to set goals, allocate resources and drive incentives and compensation. For example, SaaS businesses that can acquire new customers at double-digit rates but are unable to sustain net recurring revenue ratios of over 100% (net recurring revenues are the combination of annualized recurring revenues plus account expansion revenues minus revenue lost due to downgrades and cancellations, or customer churn). If your net recurring revenues fall below 100% investors worry because you are leaking enough revenue out the back of the revenue cycle to offset any revenue gains coming in at the front. Investors call these businesses “leaky buckets”.
Reengineering and enabling the entire lead-to-cash cycle. Requires a much better defined set of motions all along the revenue cycle, including demand generation, opportunity development and value selling, but particularly during the consumption cycle. Client onboarding, set up, education, adoption, service resolution and ultimately cross sell, upsell and retention are all critical and discrete steps that determine revenue performance and profitability. While service and success teams manage the bulk of this engagement, this requires coordinated and agreed upon set of actions and roles across the revenue team – including actions by marketing and sales throughout the customer lifecycle. “All of our customers are going through transformations in the way they sell, price, and bill,” Robbie Traube is the Chief Revenue Officer at Zuora, who’s company helps businesses move to the subscription economy. “They are all at different levels of maturity. 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 pricing of the configuration, pricing and billing of their offerings, recognizing and forecasting revenues and cash flow.”
Reallocating growth resources and investment along the revenue cycle. Moving to a recurring revenue model transforms the marketing mix and forces the reallocation of growth operating budget and capex across the revenue cycle. Marketing must shift resources to retention marketing, client education, and engagement with users across a variety of touchpoints, from invoices to chatbots, to call 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 webinar on “Tuning your Commercial Model for the Subscription Economy” hosted by the Subscribed Institute.