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Software subscriptions are eating the world: Solving billing and cash flow woes simultaneously
Although recurring revenue businesses have been around for a long time, the trend toward a subscription economy has escalated rapidly in the last few years. IDC expects that by 2022, 53% of all software revenue will be purchased with a subscription model. Even the car subscription market is set to grow by 71% by 2022.
Many types of businesses are looking for ways to earn recurring revenue — and it has gone beyond business-to-consumer companies like Netflix and Dollar Shave Club. Business-to-business companies are also joining in, even those with products that last a long time. For instance, elevator-maker Otis offers Otis ONE, a subscription-connected elevator solution that offers predictive maintenance insights.
Subscription billing options should make it easy to manage all types of subscriptions, including integrating analytics to provide a more complete picture of the subscriptions landscape.
Promising, but there are pitfalls
Subscription business models are attractive, but there are two major pitfalls. At the top of the list is payment. Regardless of company size, there’s an ongoing need to convince customers to sign up long term.
Companies also need to accommodate new payment methods and ensure ongoing compliance with interstate and international tax laws. As a result, the payment process can quickly become painful.
As any company with recurring revenue scales, it becomes increasingly challenging to manage subscriptions, especially with homegrown systems, changing subscription offers and the complexities of converting customers from free trials to paid subscriptions. Subscription billing options should make it easy to manage all types of subscriptions, including integrating analytics to provide a more complete picture of the subscriptions landscape.
Businesses also have to keep in mind that every time they add more product categories or expand into new geographies, they need to tack on extra software code to change their operations and stay sales-tax-compliant. As they expand globally, this can become an obstacle to rapid growth and flexibility.
To keep the company focused and maintain growth without having to expend resources, subscription businesses need a specialized billing system so they can focus on customer acquisition and revenue growth rather than staying on top of billing complexity.
The CAC payback gap constrains growth
The second issue: How do businesses cover the funding gap between when customers sign up and when they pay? In the subscription economy, companies that would previously receive a customer’s payments all at once now earn revenue spread across a monthly or quarterly subscription fee.
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Long-term profitability is the only growth metric that matters
Joe Yakuel is the founder and CEO of WITHIN, the world’s first performance branding company.
Your company’s one metric that matters (OMTM) shouldn’t be return on investment (ROI), return on ad spend (ROAS), net promoter score (NPS), brand affinity or one of the other sophisticated-sounding acronyms marketers use to gauge success.
Your company’s one metric that matters should be long-term profitability.
Put another way, your business should be singularly focused on how much money it can return to its owners, investors and shareholders. Sounds obvious, right?
You’d be surprised: A majority of Fortune 500 and Silicon Valley startup marketing budgets aren’t optimized for long-term profitability.
Instead, budgets are often optimized for secondary or upper-funnel metrics. Besides tracking ROI, ROAS, NPS and brand affinity, many marketers monitor key performance indicators (KPI) like net revenue, customer acquisition cost (CAC), cost per thousand (CPM) and brand recall — none of which directly correlate with long-term profitability.
In fact, many brands’ marketing departments frequently omit the word “profit” all together from the line items and KPIs in their monthly performance reports.
A good way to think about the futility of the KPI status quo is the following fictional scenario, which reflects the marketing and advertising playbooks of a shockingly large segment of American businesses: Main Street Shoes spends $100 on a Facebook ad campaign to promote a new line of sneakers to Jack and Andrew. As a result of the retailer’s Facebook ad campaign, Jack and Andrew each spend $100 to buy new sneakers.
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Calculating sales efficiency in a startup: The magic number that will help you scale
Ryan Floyd is a founding managing director of Storm Ventures, investing in early-stage enterprise SaaS companies, and the host of Ask a VC YouTube channel.
Sales efficiency is the best way to understand the economics of a business. To me, it answers the question as to whether a business can ever scale. The harsh truth is, if it can’t scale, investors won’t be interested.
Sales efficiency is more simple to measure than other related concepts like CAC (customer acquisition cost) or LTV (lifetime value). Here’s why:
- CAC is harder to truly measure, especially new CAC. In a SaaS organization, sometimes it can be hard to allocate those costs to what that new CAC is, as opposed to upsell or cross-sell within the same organization. Salespeople are almost always trying to pursue two goals:
- Trying to acquire new customers
- Selling within an existing customer (more seats within an established department, or expanding to a new division)
These activities generate different CAC; trying to strip out only the new CAC can be tricky. Sales efficiency, on the other hand, looks at all net new ARR (annual recurring revenue), which includes new customer ARR as well as expansion ARR.
- LTV tries to measure the value of a customer over time, assuming both repeat purchases and eventual churn; this gives you a good sense of the ultimate value of that customer to your business over time. The challenge with LTV in SaaS is that the data points that you might use to assume churn and repeat purchase behavior aren’t very robust — there are few SaaS businesses that have enough customers to really make these numbers reliable.
Enterprise businesses should focus on unit economics of sales early. When a business scales, it rarely buys you better economics — usually it just means more losses.
Image via Ryan Floyd / Storm Ventures
The role of sales efficiency in your ‘go-to-market fit’
At Storm Ventures we use a concept we call finding ‘go-to-market fit’ (GTM fit).
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Is your event strategy paying off? How to calculate your event ROI
Sarah Shewey is the Founder & CEO of Happily, a platform that rapidly assembles experiences for the fastest growing brands in the world with the largest network of freelance event producers. She is also the co-founder of TEDActive, the founder of EXP, a co-founder of The Margin, and the board president of dublab.
Events have increasingly become an important channel in the marketing mix, despite how notoriously “impossible” it is to measure the ROI, or return on investment. When people show up to your event, they are willingly giving you their attention for hours on end – not trying to avoid attention-grabbing ads.
A well produced experience provides a great way to reach outside of your existing networks, build a pipeline of new customers, transform existing customers into superfans, and position your brand as a thought leader. In 2017, only 7% of marketers said that events were their most important marketing channel. Last year, that number rose to 41% according to a survey done by Bizzabo.
As the founder of Happily, the largest network of event producers in the United States, I’ve had backstage access to thousands of events – some wildly successful like TED and others that didn’t ever get traction in building an engaged community.
What has defined the successful ones?
The experiential marketing industry has long struggled to measure success in a meaningful way. They propose all the same KPIs (key performance indicators), but rarely do those KPIs provide a benchmark to determine if an event is successful or give marketers the ability to tell what worked and what didn’t. They especially fall down when customers aren’t won until months after an event.
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