How to support a subscription business - Powering the recurring revenue model - EnterpriseTalk
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How to support a subscription business Powering the recurring revenue model
Table of contents Why subscription business models? 3 Features of a subscription business model 4 • Moving beyond one-time sales 5 Designing with data 5 • Scaling to support revenue growth 6 Removing the hindrances to success 7 • Finding and closing profit leak points 7 KPIs for a subscription business 8 Conclusion 9 • How do you get started? 9
Why subscription
business models?
The subscription economy, consisting of the recurring For as-a-service providers, the benefits include:
payment for products or services, has been around for
hundreds of years. Decades ago, subscription business • Steady revenue streams. Revenue and cash flow
models included services like books, newspapers, and become more predictable, and the cost of sales is
milk delivery. More recently, we’ve seen rapid growth in spread out over time. Financial planning and reporting
other B2C services, including video streaming, meal box become easier.
deliveries, and fitness products and services.
• Less vulnerability to crisis-driven supply chain
But the subscription model is not limited to B2C. In just disruption (e.g. COVID-19) for certain industries. The
the past few years, we’ve seen an explosion in subscription relative predictability of subscription models can help
business models in the B2B sector. Software as a Service you streamline inventory and make smarter decisions
(SaaS) is one of the older (and perhaps the most well- on how you purchase raw materials.
known) B2B example, but more recently, every sector from
technology to manufacturing has begun to offer products • Better loyalty and engagement with customers,
as a service. Everything from tractors to medical equipment leading to stronger relationships and reduced churn.
to jet engines can be served up via subscription offerings.
• New opportunities for ongoing upselling and cross-
Both customers and providers are seeking a move to selling, increasing share of wallet within the existing
subscription models. For customers, this model is popular customer base.
because it lets them:
Yet, like any other business venture, subscription models
• Pay only for what they use or consume come with challenges. Research indicates that 70%
(prioritizing usage over ownership). of business leaders say subscription business models
will be key to their future success, but less than 10% are
• Reduce upfront acquisition costs. B2B subscribers can generating any significant revenue from them. Why not?
become asset-light firms; they hold fewer fixed assets Most often, it’s because the business hasn’t adapted its
on their balance sheets, which manifests in higher
return-on-asset ratios.
• Avoid obsolescence and repair costs.
• Ensure easy replacement and upgrading.
• Access a convenient, tailored buying experience.
Supporting a subscription business 3
processes and mindset to satisfy customer expectations.
Subscription customers aren’t just buying a service; they’re Features of a
subscription
buying an experience. Your customer doesn’t care whether
they’re dealing with the front office or the back office. What
they care about is that the experience is good, fast and
connected across every step in the relationship. Because
of these expectations, subscription business models often business model
require head-to-toe change. Your entire business must:
• Refocus its culture and go-to-market to support and
sustain long-term relationships. Subscription management is multidisciplinary: it
requires changes across service configuration, selling,
• Reimagine financial systems to support recurring revenue provisioning, billing, and customer experience. This
and real-time flexible billing. presents several considerations to think through before
you decide what to offer.
• Rework revenue generating and reporting systems and
processes to support the complete customer lifecycle.
Customer experience
It’s not a trivial change, and it takes time. But with the right Customers want to browse various plans, select
approach, it can bring all the benefits of steady, recurring what fits them best, and personalize offerings.
revenue and lifelong customers. Let’s look at what you
need to get started on your journey. Revenue management
Subscriptions often have rates for different tiers of usage,
overage fees, and custom plans. This makes tracking and
billing difficult to manage with outdated billing systems or
“ In disruptive times, investing in and spreadsheets, resulting in revenue leakage and challenges
with revenue recovery.
changing business models can grow
market share. That calls for companywide Contract management
collaboration—business executives Customers want to renew, suspend, and amend their
subscriptions at any time during the billing cycle, for any
must work with financial executives, product or service.
who in turn work with their supply
chain managers to understand where Service management
You’ll need a system to monitor and repair products being
vulnerabilities lie—and where changes offered as services that are located at customer sites.
make sense: new product lines, for
example, subscription services, or
digital platforms.”
2021 planning: New business models, big opportunity
MIT Technology Review Insights
Supporting a subscription business 4
Some questions that companies should ask before
embarking on a subscription model: Designing with data
• Will my business be sustainable and profitable, given
the projected recurring revenues and the costs to
provide the service level I’m committed to?
Data is key to designing a subscription-based offering.
• What price will my customers agree to pay for current Let’s look at a hypothetical example of how data could be
and future services? monetized, used as a competitive differentiator, or both:
• How can I engage with my customers to strengthen A food service distributor, who sells fresh ingredients to
our relationship, be more loyal, subscribe to future hotels, restaurants, and hospitality groups, “grades” all the
offerings, and consistently renew? food they sell, in terms of quality. Because of this grading
process, they hold a vast amount of nutritional information.
• Which new bundled offerings of products and The distributor decides to turn this data into a service. Now,
services do I need to gain market share and beat their customers still buy food, and they can also subscribe to
the competition? a service that provides access to the food’s nutritional content
(calories, fat, sodium, etc.). This lets the restaurants and other
• How can I support my products at scale, since establishments put this information on their menus and web
maintenance and support are now part of my sites—so diners can make informed decisions about what to
subscription model duties? order for dinner.
Data has value, and when you turn it into the right offering or
service, it can add more value. One of the biggest issues that
companies face, when trying to move to subscription models,
Moving beyond one-time sales is that their data is locked in silos across the company—
difficult to extract, reconcile, and analyze.
The power is having all data and interactions in one place:
A 90-year-old telecommunications provider recently transformed
applying AI, automation, and analytics to detect and then act
the way it sells its equipment, moving beyond its traditional B2B
on changes using the right, timely data.
business and opening new revenue streams by selling directly
to consumers.
Having grown over decades by acquisition, the company had
cobbled together its sales platforms with more than a dozen
different portals—all with different, inconsistent products sets
and pricing—supported behind the scenes by dozens of CRM
and ERP systems.
The company chose Oracle Fusion Cloud ERP and CX to:
• Replace a 30-year-old custom platform with modern
solutions for both B2B and B2C sales
• Accelerate sales by reducing quote cycle time
• Drive targeted B2B marketing campaigns
• Shorten time to market for new products and services
• Introduce new revenue streams
Supporting a subscription business 5
Managing subscription revenue is a struggle for businesses
with limited (or no) integration between their front- and back-
office systems. In providing a great customer experience, Scaling to support revenue growth
you need to consider your ERP and supply chain just as
much as your customer-facing software. There are countless
ways in which the front and back office interact throughout
the customer lifecycle. Here are 6 of the most common Edmunds.com provides objective information that helps U.S. car
interactions that support a subscription business model: buyers make informed decisions— everything from vehicle history
to used car appraisals. It offers 40,000 subscription products to
about 26,000 automotive industry customers.
What customers buy (subscription, one-off product, Edmunds’ legacy systems took weeks to process billings, hurting
1 or a mix of the two) affects how your product/service customer service and revenue growth. The company decided to
is fulfilled, delivered, billed, paid, and accounted move from disparate, on-premises systems to Oracle Fusion Cloud
for. The number of buying options can translate ERP and Oracle Subscription Management.
into thousands of consumption choices. Each
amendment, add-on, cancellation, or other change Edmunds used to get 400 data mismatches per run; that number
triggers a vast amount of relevant data that needs to fell to just one when the system went live. “I can’t recall a single
flow between different systems. case where a customer called us and said their invoice was wrong,”
says Edmunds’ director of revenue cycle, Trevor Persaud. They
expect the new system to support substantial growth, processing
approximately $100 million in annual revenue.
During customer acquisition, you need to connect
2 data from sales engagements, product options,
pricing, and fulfillment.
When it’s time to bill, you need to pull usage This means rethinking what it means to engage with
3 metering, pricing, and contract details, then customers at every touchpoint. To do this, you need to
pass that off to billing and payments. connect front-office and back-office processes—and the
systems that support them.
Complex sales contracts—particularly those with
4 mixed goods and services—are subject to a new set
of revenue recognition standards.
At renewal time, you need to pull together lifetime
5 value, pricing, contract details, product options,
and more choices for upsell/cross-sell.
Customer lifetime value and churn are new key
6 performance indicators (more on this below) that
must be accurately measured and tracked.
Each part of the organization has different areas of
responsibility; the one thread that pulls them all together is
the customer, and how they contribute to overall customer
retention. Processes must be re-organized around the
customer lifecycle: signing them up, provisioning services,
billing them (sometimes based on usage), handling problems
or issues, and turning customers into repeat purchasers and
brand advocates.
Supporting a subscription business 6Removing the
hidrances to success
When trying to connect front- and back-office systems, many This is also a boon to reporting, which becomes much
companies start with the front end and ignore the back. The faster and boosts confidence in the numbers. When data is
reason is understandable: the front end is what the customer consistent, reliable, and visible across the business,
sees, and companies want to make a good first impression. you can:
But all this does is create yet another data silo, with brittle
integrations to back-end (often legacy) systems that • Gain accurate insights for better decisions
don’t provide the functionality needed to support
a subscription business. • Build a data-supported case for new products
and services
A better approach is a connected system that lets data flow
seamlessly (and accurately) from one system to the next. • Improve the accuracy of your financials
A comprehensive subscription solution should include
support for: • Measure KPIs and other success indicators
• Sales and ecommerce This brings us to the final major change required for
a subscription business model: measuring success.
• Configure-price-quote for more complex offerings
• Order management
• Supply chain management for product-as-a-service Finding and closing profit
offerings leak points
• Subscription management
A software-as-a-service (SaaS) provider relied on a disparate set of
• Financials and accounting, including revenue systems to support front- and back-office functions. Experiencing
management for more complex offerings about 40% annual growth, the company need a more robust ERP
and subscription billing solution to scale efficiently.
• Field service and logistics, including IoT for more
With a unified Oracle Cloud, the company minimized touchpoints
complex, product-as-a-service offerings (such as
between their previous, disparate systems, which required
tractors that your company might need to repair)
manual hand-offs. These manual processes were a potential
profit leak point, and a hindrance to gathering data to make
Ideally, you’ll want a connected cloud that uses a common real-time decisions.
data model across all systems, from ecommerce to
accounting. The benefit of a common data model is that it Oracle Cloud ERP and Subscription Management helped the
provides one reliable, accurate record of each customer SaaS provider secure market share against competitors, realize
that you can analyze from multiple points of view. It significant cost savings, accelerate growth, and increase
customer satisfaction.
eliminates the need to integrate and reconcile data from
multiple systems; you’re no longer left guessing which
numbers are right, because they’re the same everywhere.
Supporting a subscription business 7KPIs for a
subscription business
Key performance indicators for a subscription business model Annual recurring revenue (ARR): This represents the yearly
focus on the customer, not on your company. This shift in revenue of a subscription. This metric is helpful to see year-
view helps you ensure that the customer experience is your over-year trends and set growth goals. You can also calculate
top objective. Unhappy customers will desert you and might average MRR or ARR per customer. Streaming video services
write negative reviews online. Happy customers will renew look at these numbers to determine if they can raise their
and buy more. If you can accomplish the latter, your new rates without affecting churn.
business model can be successful.
Churn rate: The number or percentage of customers that
Some of the top KPIs to consider include: terminate a subscription during a given billing period. A
healthy subscription business should always be adding more
Monthly Recurring Revenue (MRR). MRR doesn’t include any customers than it churns. When you see large spikes in
one-time charges (such as activation fees or setup fees) nor customer churn, it can be a good indication that you need to
does it include any subscriptions that are suspended. You can make a change. When customers terminate their subscription,
choose to include usage charges; most companies that offer you can try to gather data points on their reasons for leaving,
services in usage-based or consumption-based models will and use the insights to retain more customers.
have to estimate the usage for revenue reporting (as per
ASC 606/IFRS15 compliance standards). Revenue churn: This KPI expresses the percentage of lost
revenue from existing subscribers during a given period.
This is the financial impact of customers terminating their
subscriptions, so it’s critical to track and monitor.
Renewal rate is a crucial metric to forecast future growth.
Typically, subscription businesses should start the renewal
process at least 30 days in advance. Plan ahead, so you
can run targeted customer engagements to keep the renewal
rate healthy.
Customer lifetime value (CLV) indicates the total revenue
potential from a customer. For a subscription business to be
profitable, the CLV should always be higher than the sum of:
• The customer acquisition cost
• Ongoing sales and marketing expenses
• Operating expenses
• The cost required to manufacture the products
and services the company is selling
Supporting a subscription business 8Conclusion
In today’s era of fierce competition, customer loyalty is hard-
won. But the very nature of the subscription model gives
you a head start in the race, because it’s the foundation of
a recurring customer relationship. Subscriptions provide
opportunities for ongoing upselling and cross-selling to
organically grow the business. And new customers often
come by word-of-mouth, as long as you keep existing
customers engaged and recognize that the value of
their investment is the primary factor for business growth.
From there, finance leaders can lay the groundwork for the
ultimate prize: long-lasting and mutually beneficial
customer relationships.
How do you get started?
We’ve created a starter kit for CFOs and other finance leaders
looking to move to subscription business models. It outlines
five steps to get started, as well as some “do’s and don’ts”
to keep in mind along the way. We encourage you to read
the best practices and first steps to succeed with a
subscription business.
Supporting a subscription business 9Copyright © 2021, Oracle and/or its affiliates. All rights reserved. This document is provided for information purposes only, and the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document, and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission.
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