July 23, 2020
The recurring revenue business model continues to gain traction as organizations embrace the value in consistent, predictable capital in-flows. The revenue model continues to stretch its wings, as more organizations that have traditionally operated in the one-time-purchase paradigm find new ways to apply subscription offerings to everything from spas to apparel.
Today, pivoting into the subscription world goes beyond offering a lucrative opportunity for many businesses. Rather, it’s a means of survival for some companies, says Nishant Nair, CEO of RecVue.
Speaking with PYMNTS, Nair said that while it’s vital for businesses to adopt the recurring revenue model, it’s just as imperative that they understand what that means for their order-to-cash processes. For many firms, the shift presents entirely new challenges in revenue recognition and management — and if not tackled appropriately, the subscription pivot could derail organizations’ broader digitization efforts.
In recent years, the proliferation of the recurring revenue model was largely fueled by organizations looking to embrace the predictability and consistency of incoming payments.
Today, said Nair, transitioning to this business model is increasingly driven by necessity.
“There are businesses today that don’t have a recurring revenue model, but the fact is that those kinds of businesses who have a one-time-sell model need to survive in this new economy,” he said. “They’ve got to figure out a way to move toward recurring revenue.”
With the global pandemic kickstarting organizations’ business model and product development roadmaps, Nair acknowledged that many companies will look very different in the wake of COVID-19 than they did before. Within that transition, more firms will embrace subscriptions thanks to their predictable cash stream, which can help firms weather financial and market volatility as seen today.
He offered the struggling travel sector as a prime example of the opportunity for this pivot to support the survival of companies.
“With the airline industry, if you had a subscription model in which you paid $1,000 or $2,000 per month to fly wherever you want, it’s much more difficult to cancel a subscription than to cancel a particular, single flight,” he said.
Embracing this strategy isn’t only about adjusting how customers are billed, however. There are widespread ramifications to how an organization operates, touching everything from how products and services are priced to how firms manage their order-to-cash cycles.
Even for businesses that remain in the traditional one-time-purchase model, order-to-cash can be a headache, particularly within larger organizations. Nair explained that in many firms, because various business units are operating within data silos, it can be difficult for a company to obtain a single, holistic view of order-to-cash when sales and payments information is disbursed across those business units.
When a subscription model enters the fold, the way a firm sells products and recognizes revenue fundamentally changes.
“It actually makes it more complex than the traditional, one-time sales model,” noted Nair. “With the traditional model, you book, you fulfill and you invoice a customer. But with recurring revenue, it’s not that simple. It’s a long-term relationship you have with your customer.”
Accounting standards for how revenue is recognized is one area that can be particularly challenging. To address this hurdle, RecVue recently announced a partnership with Effectus Group, which ensures that financial reporting remains compliant even as standards change.
Working with trusted partners, advisors and FinTechs can be key to ensuring that the pivot from a one-time sales model to a recurring revenue model is as seamless as possible, while maintaining compliance and a holistic view of cash positions.
As a function that sits between accounts receivable (AR) and the customer relationship management (CRM) portal, order-to-cash is a critical component of promoting financial resiliency, and should be a key focus as part of the enterprise’s broader digitization efforts, Nair explained.
Businesses must acknowledge that their order-to-cash strategy will differ based on their unique characteristics, including product, industry and other factors. Ensuring that an order-to-cash system can work in parallel with other back-office systems — and enabling data integration between platforms like accounts payable (AP), AR and CRM — equips businesses to make the necessary adjustments to pricing, billing and other functions without compromising customer satisfaction.
But this adjustment is not only about technological adoption. As Nair pointed out, overhauling revenue models creates an entirely new paradigm of how an organization functions — and finance chiefs must be prepared. That means enabling all departments, from sales to product to customer support, to participate in facilitating a long-term customer relationship.
“When companies talk about digital transformation, it’s not just about putting systems in the cloud,” he said. “It’s much more than that. It’s a fundamental shift in the way you do business — and that doesn’t come from technology, it comes from within.
“The way we look at it is: Shift, innovate and scale,” Nair continued. “You have to think long and hard about current processes and systems, and you have to scale with more complex and dynamic recurring revenue streams.”