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Brendan O’Brien is the Co-founder and CIO of Aria Systems. He has been in the subscription services business for over 20 years, innovating database-driven, enterprise-grade web applications for companies ranging from Medical Manager, to Wright Express, and LaserLink.
According to Gartner, more than 80 percent of software vendors will move to subscription models by 2020. From software to shaving, virtually every industry is following suit.
Moving from one-time sales to subscription and usage-based recurring revenue models poses a unique set of challenges.
We had Aria Systems Co-founder and CIO Brendan O’Brien over for coffee to help clear the air.
Why has the popularity of subscription services taken off in the last few years?
Simply put, because “paying as you go” often aligns the way people and businesses pay for service with the way they consume that service.
Simultaneously, ‘the cloud’ has become truly a viable delivery model for virtually any digital service, and XaaS (anything as a service) / cloud platforms naturally lend themselves to being paid for in some kind of recurring fashion.
This often removes what was once a daunting barrier-to-entry for businesses and consumers to quickly gain access to platforms and services that were previously only available to those who could write a big check up front.
What are some new models you are seeing today?
There’s nothing new about usage-based pricing and billing: telcos have been doing it forever.
While there’s certainly nothing wrong with the simple subscription model, which offers an “all you can eat buffet” for a flat, rhythmic price, it should not simply be assumed that it is the way all customers want to pay for all services.
For some types of products, many consumers may prefer some form of “pay per drink” model, where they are billed in arrears for what they consumed, or hybrids that combine a simple subscription fee with some kind of usage charge (often based on an allowance of consumption with “overage” charges when that allowance is exceeded).
When switching to a recurring revenue business model, what’s the first big hurdle companies usually face?
They have two hurdles to overcome. The one that’s obvious to most of them is the technical hurdle, meaning they simply don’t have the systems in place to do it.
But the more daunting hurdle, which is unfortunately the hurdle that is less apparent to many new entrants into recurring business model, is a corporate culture hurdle.
If a business is new to recurring revenue models, that means that the one-time-sale model to which they’re accustomed has likely constructed a culture whereby corporate success is measured by traditional KPIs like “margin” and “cost of goods sold”, which are not the same KPIs by which recurring models’ success is measure, e.g. “churn rate”, “adoption rate”, “retention rate”, “consumption levels”, etc.
Additionally, a non-recurring business model of any kind is about “customer acquisition” followed by “customer re-acquisition”, whereas recurring revenue is about “customer acquisition” followed by “customer retention”.
Who are the decision makers that need to be involved in planning?
Based on the significant challenges and shifts brought on by newly moving into a recurring revenue model for the first time, wise buyers will understand that IT/Ops, Finance, Customer Care, Sales Ops, and Product Management/Marketing are all key stakeholders and should have a seat at the table when evaluating platforms.
The systems and processes they adopt will directly influence the lives of each of these groups on a daily basis going forward, and making a poor decision because the concerns of one or more of these groups was initially ignored can seriously jeopardize the business.
What kind of technical infrastructure changes might be needed?
For newer, “born digital” businesses, there is likely no challenge to them. But for more established enterprises accustomed to on-premise, monolithic back office systems, or companies that are new to recurring revenue (or, worst case, companies that are simultaneously disadvantaged in BOTH arenas) the biggest change is moving to a “best of breed” and away from a “best suite” infrastructure model.
The beauty of cloud-based platforms of any kind is that they are comparatively much easier, faster, and less costly to deploy and maintain.
How does switching to a recurring revenue model change the relationship to your customers?
Only a recurring revenue model allows a business to claim that someone “IS their customer” in a true, present tense way after an initial purchase.
If you go into Banana Republic to buy a sweater, the moment you walk away from the register with your sweater in hand you can only truthfully be referred to as a customer in the past tense.
Customers of recurring revenue providers are tethered to those providers in a perpetual way, so the relationship becomes firmly focused on constantly elevating customer satisfaction.
The recurring revenue businesses that address customer satisfaction really well do so by paying very close attention to exactly how their customers use their service, not merely how / if / when they pay for the service.
Netflix has the simplest possible recurring revenue paying model (a low, flat monthly fee) but their customer satisfaction is high because they pay very close attention to exactly how each customer utilizes the service.
In one sentence, what is your best advice for a company looking to implement or expand recurring revenue business?
Know up front that it’s going to change everything at a technical and social level of your business, so get broad support and buy-in from all internal stakeholders early in the process if you want to maximize your chances at success.
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