The subscription model, or SaaS, has transformed the software industry. We’ve seen this same shift play out in many other industries as well. Today, unless your organization is equipped to succeed in this new world of recurring revenue you risk being left behind. This was the premise behind a recent webinar I led with guest speakers Amy Konary, research vice president at IDC, and Rory Cameron, senior vice president, corporate development & emerging platforms at CallidusCloud, “5 Keys to Success with a Recurring Revenue Model.”
The webinar kicked off with Amy Konary sharing IDC’s most recent research into the software licensing landscape, where revenue from the subscription delivery model continues to rapidly outpace perpetual license revenue in terms of growth rates. Her research also showed how this shift is expected to continue over the next 18-24 months. Konary described the challenges associated with the recurring revenue and subscription model and then offered practical advice on how to overcome those challenges.
As a SaaS industry leader, NetSuite has a great deal of insight into the world of recurring revenue and it was my pleasure to share our own experience and learnings. When it comes to the recurring revenue model, there are a lot of moving parts. It’s a slow-building business (for example, the booking is just the beginning) with a model-based approach to the P&L. While there are more levers to pull compared to the one-time purchase model, none of those levers are fast-moving. Yet with the right approach, the recurring model has the potential to produce predictable revenue streams, which is why it is attractive to both companies and investors.
During the webinar I shared five keys to success that have allowed NetSuite to achieve rapid growth in the world of recurring revenue.
1. Automate your recurring revenue engine
It’s important to remove friction in the order-to-cash cycle, so at NetSuite one of the first areas we focused on was a complete end-to-end automation of our own recurring-revenue engine.
All parts of a business are involved in building and growing recurring revenue, and all of those moving parts I mentioned earlier result in complex business processes. As a result your systems — from quote to order to billing to revenue recognition to reporting, planning and forecasting — have to work seamlessly and without the need for time-consuming manual intervention.
2. Capitalize on your customer annuity
Renewals are critical to sustainable growth in the world of recurring revenue. If all of your resources are focused on bringing in new business, and you aren’t focused on the renewal of your installed base then you are probably going to have a churn problem. And nothing strangles recurring revenue growth more than churn. But while the renewal is important, you also have to guard against downsells (a renewal at a lower rate) and ensure you are equipped to maximize upsells, which allow you to ultimately renew at a higher rate. This is another example of the additional moving parts to consider and manage.
3. Enable real-time 360-degree visibility across the organization
I mentioned earlier that growing recurring revenue is everyone’s job — sales, support, marketing, finance, professional services and product management. If the data on your customers is siloed, then it makes everyone’s job more difficult. Customer history must be centralized — sales discussions, service issues, billing and collection issues — ensuring that every customer touch point is equipped with the latest information to drive satisfaction and ultimately renewal.
It’s also important to understand how your customer is using the solution — which components or modules? What are their usage patterns? Is their usage increasing (upsell opportunity) or decreasing (downsell risk)? Without a 360-degree view of the business, this granular level of insight is difficult to achieve.
4. Focus on the metrics that are critical for success
Some of the key metrics we use to run the business are ARR, CLTV, Retention Rate, CoCA, Adoption Rate, and a few key ratios on sales and marketing efficiency. Bessemer Venture Partners has some excellent articles on this topic that I recommend reading.
5. Keep the big picture in mind
For many companies with a recurring-revenue model, there are also revenue streams that are one-time in nature and they need to be incorporated in the end-to-end revenue engine. These could come from professional services engagements (fixed bid, milestone, T&M set-ups), or from physical goods that go with the subscription.
When it comes to billing and revenue recognition these non-recurring streams can further complicate a complex arrangement governing when customers are billed vs. when revenue is recognized. With these non-recurring revenue streams there is also a need to tie into the commerce layer, the inventory management layer, and the professional services project tracking, and that’s just keeping with my example.
After sharing insights into the best practices we use here at NetSuite, the final portion of the webinar described the journey CallidusCloud undertook to transition from a perpetual license model to a leading SaaS company. Rory Cameron described the difficulties their organization overcame during this journey, the results they’ve achieved and specifically how they were able to realize their growth plans.
Organizations that already have adopted a recurring-revenue model and those that are looking to make this transition can both benefit from watching the webinar recording for more detailed insight around these five keys for success.
Kimberly Odom is director – vertical marketing, software industry at NetSuite. She has 15+ years’ experience in enterprise applications including ERP, CRM, multichannel customer service and marketing automation. Prior to NetSuite she worked at Contactual, a SaaS provider of customer interaction management solutions, where she was responsible for development and execution of the company’s marketing strategy. Her background includes roles in product marketing, product management and channel sales with startup, midmarket and Fortune 500 companies.