By John Phillips, General Manager, EMEA at Zuora
Today’s pandemic has accelerated a global trend that was already well underway when it comes to consumer buying behaviours: the end of ownership. In fact, according to research undertaken by Harris Poll, 74% of adults believe that in the future they will own fewer physical goods, choosing instead to turn to subscription services.
Whether it’s television streaming services or recipe box providers, as individuals experienced huge changes to routine and behaviour, the use of subscription models increased. As a result, we’re witnessing an acceleration in the growth of what we refer to as Subscription Economy, an era defined by the broad preference for access to subscription services over the ownership of traditional products.
Yet, businesses with these models in place cannot afford to become complacent. Customer expectations continue to rapidly evolve. In order to continue to prosper during challenging times, organisations in every sector need to be agile in order to deliver the seamless, personalised subscriber experiences that will enable them to not only stand out from the crowd and appeal to new customers, but also encourage long-term loyalty. This is where the finance department comes in.
The modern CFO
The remit of today’s modern CFO stretches far beyond balancing the books and managing budget spreadsheets. New technology, namely automation, along with market uncertainty amid the current pandemic, has ushered in the modern finance era.
In fact, our recent State of Finance Amid COVID-19 report found 80% of finance professionals have been very or somewhat involved in their company’s internal and external response to today’s pandemic. With the help of modern technologies – such as subscription billing software – finance leaders can serve as strategic advisors, helping to make critical business decisions.
One area in which finance should be playing a key role is subscriber experiences. For example, with the rise of the Subscription Economy, the recurring bill has become a new way for businesses to glean insights around changing consumer needs and behaviours. When used in the right way, these insights can help businesses to add true value to their services.
Whilst many companies regularly spend millions on front-end initiatives such as product-focused marketing and social media campaigns, the most successful subscription businesses are focused on backend technologies and processes, which not only serve as a foundation for agility and scale, but offer critical insights to end user usage and preferences.
By failing to take into consideration back-end subscription finance processes and insights as a part of the decision-making process, many businesses are missing a mark when it comes to elevating the subscriber experience.
For example, in subscription-based models, a company’s revenue stream could act as a great indicator of whether the subscriber experience strategies being implemented are having the desired impact. Whether it’s upgrades, downgrades, suspensions or resumes, revenue is always changing. A subscription model enables you to track it more effectively. By analysing revenue trends, an organisation can build a better picture of who their target customer is and what they want in a brand.
As such, when accessed in real-time, customer usage data gleaned from finance subscriptions could lay the groundwork for some important organisational changes – whether that’s implementing new services or changes to product pricing. In our current climate of uncertainty, unlocking the right revenue insights quickly and acting upon them could be the difference between a business succeeding or failing.
The winning metrics
Whilst businesses with a subscription model in place are gifted with a wealth of customer data, this data means nothing if it cannot be used to derive actionable insights and drive growth. In order to ensure that progress is tracked accordingly, there needs to be a verified set of metrics in place.
As subscriptions are forward looking and often form over the life of a customer, traditional Generally Accepted Accounting Principles (GAAP) practice can’t measure their true value. Therefore, a new set of metrics is needed which should include:
· Net Annual Recurring Revenue Changes – According to the Subscribed Institute – a dedicated think tank focused on the most critical business problems of the Subscription Economy – recurring revenue is the single most important metric for any subscription business. It’s important to monitor recurring revenue changes across the following categories: new, contraction, expansion, and churn. Then, factor in discount charges to get a complete picture of the transactions driving growth in your business.
· Net retention rate – or a company’s ability to manage risk whilst remaining profitable – is another helpful tool. Zuora recently studied data from 17 public companies to identify what there is to learn about retention from today’s leading subscription companies. The key finding was that median net retention stands at 100 percent, meaning that the median company gains at least as much recurring revenue as it loses from each cohort of customers over time. Yet, the top half of companies in net retention grow at nearly twice the rate of companies in the bottom half. Therefore, we can probably conclude that net retention is one of the key ways in which hyper-growth companies become hyper-growth companies.
· Recurring-to-consumption billing ratio – Zuora’s Subscribed Institute found companies leveraging a combination of recurring and usage pricing grew 30% faster than those who don’t have usage pricing. In order to make this metric a success, organisations will need to monitor and identify areas to consider utilising usage-based pricing.
In today’s uncertain landscape, customer loyalty has never been more important. It has also never been harder to achieve. Being able to keep up with changing consumer behaviours and implementing the right customer experience initiatives at the right time could be the difference between your business remaining profitable or collapsing. The insights around consumer spending that finance subscription models provide could prove an invaluable asset, enabling you to future-proof your business no matter what lies around the corner.