As you know, recurring revenue is the portion of a company’s revenue that is expected to continue to renew in the future dependent on customer satisfaction and renewals. Unlike one-off sales, these revenues are predictable, stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty. In this uncertain time, some recurring revenue business models such as monthly work space companies or gyms, have been hard hit, while others like food delivery apps, streaming media, teleconferencing and collaboration software, have witnessed a huge rise in demand for their services. For enterprises, establishing recurring revenue isn’t only good for business, it ensures you’ll get the maximum value when it’s time to sell. With a recurring revenue model, businesses can predict what percentage of revenue may be lost each month and also how many new subscriptions are likely to join. Tracking membership metrics with a metrics dashboard can be invaluable for managing your monthly, quarterly and annual revenue.
According to CFO.com, recurring revenue business models, also known as subscription or usage-based models, are opening up new opportunities across many industries — even in sectors where they haven’t traditionally. For example, the subscription model has taken root in industrial sectors, like heavy equipment manufacturing, and in specialty markets such as medical devices. Two key benefits accrue from recurring revenue models. First, the initial sale becomes just the starting point of an ongoing customer relationship that can present an abundance of chances to upsell and increase share of wallet. Second, the seller receives a series of payments over a product or service’s lifetime instead of a single upfront payment. As a result, cash flows are steadier and less likely to suffer a sudden drop. Making planning easier for the finance team.
As more companies adopt recurring revenue products, CFOs try to plan for the necessary changes in processes and IT systems to counter the following hurdles and pain points:
However attractive the product, internally the organization may face unique challenges and operational hurdles. In a survey by CFO.com, out of the companies launching a recurring revenue product or service, nearly two-thirds (65%) of those surveyed faced operational problems in doing so. The problems arose in numerous areas — from not being set up to process, track, and manage recurring revenue, to not having the tools to manage and leverage the data produced by subscription sales, to not using the metrics that the business model demands. More particularly, basic tasks such as calculating and managing pricing can become much more complex, because prices can vary according to subscription levels, term lengths, and product or service bundling. Renewing customer contracts can also be a pain. Process-driven delays for a recurring revenue customer can limit opportunities for renewals. And the sales function often adds to operational challenges by demanding too much flexibility in product design and pricing, resulting in manual downstream processes to clean up confusing invoicing and billing. Finally, nearly half (48%) of companies with a recurring revenue business model struggle to meet accounting and reporting challenges created by the dynamic customer relationship. Plus increasing regulatory pressures like ASC 606 and IFRS 15 demand improved revenue recognition, compliance and reporting, stipulating that revenues have to be recognized when realized and earned, not necessarily when received. If not properly managed, those accounting rule changes can lead to audit and compliance issues.
Constant attention, training and cultural shift
Renewals often require the same level of attention as new sales. Sales and marketing become more involved in the lifecycle of the customer at all potential transaction points. In addition, many non-sales groups in the company become customer facing, and interactions between finance and accounting, customer success, services, and sales and marketing need to occur more frequently. Improved coordination between the sales and finance teams is a key to success.
Most common pain points
Selling via subscription model can also necessitate IT modifications. Traditional systems have a hard time handling bundling. When a subscription product or service is sold with upgrades or add-ons, a traditional system may create a new SKU for every change to the bundle, producing an array of pricing, bundling, and distribution combinations. A traditional order and invoicing approach can also lead to frustrated customers and subscription terminations, if multiple cancelled invoices and new invoices are produced with every change.
The most reported pain points arising from the above factors are:
- Inaccurate sales or financial forecasting
- Inaccurate reporting
- Lengthy new product or market launch timelines
- Manual processes to create or manage orders or invoicing
- Collection difficulties due to invoice disputes
- Broken system integrations
- Renewals forecasting and management
- Tax calculation difficulties for subscription-based products
- Lengthy pricing approvals
- Inaccurate prorating of charges for subscription products
Typically, companies that transition to a recurring revenue model use their existing customer relationship management and ERP systems. Since most ERP systems are designed for transactional businesses, it can be difficult for them to handle sales spanning multiple periods.
To address these issues RecVue’s founders built the only enterprise monetization platform based on big data and powered by Oracle’s cloud infrastructure that helps enterprises adopt and manage innovative business models to drive recurring revenue growth. With RecVue’s revenue management capabilities, finance organizations have an easier, more secure process for translating complex contractual relationships into accepted accounting statements to meet rigorous compliance rules. While other revenue recognition solutions require that you re-build the order, with RecVue the contract is the central element for all downstream processes. RecVue’s customers are mastering hybrid subscription and high-volume usage-based models with sophisticated pricing and rating scenarios, while gaining operational efficiencies, expanding their business footprint and exceeding customer expectations. RecVue’s unique, unified platform integrates with the ERP and front-end order processing systems.
CFO’s are selecting RecVue’s platform for the immediate benefits the platform offers including:
- Cost cutting: Streamlined automated processes offer greater accuracy and faster invoicing
- Mitigating Risk:Detailed audit trail reduces errors
- Spurring Business Agility:Supports new pricing bundles and easily adapts to new business models
- Optimizing Revenue: Eliminates revenue leakage by identifying errors and scales with your business
What’s more RecVue’s customers are meeting their business and finance goals simply by adopting a smart monetization platform that helps them not only scale resources to meet business growth, but also manage millions of billable transactions easily. These customers are also able to overcome the pain points and improve efficiencies across order to cash, revenue and general accounting while gaining real-time access to data at multiple levels: price/rate type, product, customer, contract etc. Automated contracts ensure that billing reflects the latest terms and conditions, such as CPI calculations and integrates usage data sources into the billing engine. Last, but not least, the finance functions are able to increase the accuracy and timeliness of the billing and invoicing process by aggregating billing information in a single system to improve analysis and forecasting.
Reach out to us today for a subscription billing assessment and to learn how smart monetization can fuel your recurring revenue business model.