Editor’s note: The Internet of Things, combined with the cloud, opens doors to new ways for companies to connect with customers through products and services, made even more attractive because of disruptive new pricing and packaging models. Global brands from United Airlines to Target to Sony and Audi are some of the early adopters disrupting their markets with the recurring-revenue model.
Aria Systems, launched in 2002 and headquartered in San Francisco, is a centralized hub providing a SaaS solution for full management of all aspects of billing in recurring-revenue businesses in all industries. In this interview, co-founder and chief architect Brendan O’Brien discusses the profound effect that the Internet of Things and new pricing models have on everything from food to appliances to cars and more. He also shares information about the biggest mistake companies make when shifting their business to a recurring-revenue model.
When did your company note the disruption in the market because of the Internet of Things and new payment models? What caught your attention?
Brendan O’Brien: There are two movements that were at the nexus of this movement, like two waves crashing on the shore at the same time. The one we predicted when we founded Aria Systems was the adoption of cloud/SaaS-based delivery models for back-end, on-premises systems. But the adoption of recurring-revenue models by non-revenue players caught us by surprise. It was about 2012 when we saw the first inklings of large enterprises and household brands disrupting the market with new packaging and pricing models.
These were companies that were well established at selling goods and services on a one-time basis. The cloud delivery model allowed them to be disruptive by coming up with new business models that are recurring revenue based. Some of their products and services are subscription based, some are consumption based and some are hybrids of the two.
Please give me some examples of household brands and how they are disrupting the market.
Brendan O’Brien: Target came up with a plan for selling diapers on a subscription basis. United Airlines created a model for subscriptions for automatic upgrades and access to their premier lounge.
A global healthcare innovator recognized that the barrier to entry for hospitals purchasing expensive medical scanning devices (CAT scan, PET scan, MRI machines) was so high that regional hospitals couldn’t afford to buy these devices and therefore couldn’t offer those services and had to send patients to larger city hospitals. They came up with a way to lease these machines to hospitals at a much lower cost and charge them on a consumption-based (per scan/per use) model.
A global software maker switched from its business model of selling shrink-wrapped software to providing it on a subscription basis over the Internet.
Why are companies shifting to a recurring-revenue model? Is it something more than the predictability of revenue?
Brendan O’Brien: There are two driving forces. Revenue predictability is very attractive to CFOs and investors. And on Wall Street recurring revenue adds multiples to a company’s stock value.
The other driving force is the technology enablers. In the case of the global healthcare innovator, for example, the technological enabler is the Internet of Things enabling putting software in various devices to enable monitoring anything that device does and shipping the data to a server via the Internet. In the case of a global software maker, technology enablers include improved browsers, Java script and Flash, which enable inexpensive delivery of a product over the Internet instead of having to install it locally on a device.
How does the recurring revenue model help reduce costs?
Brendan O’Brien: It costs a lot more to acquire a customer than it does to retain a customer, no matter how you measure it and no matter what business you’re in.
The fundamental risk in the world of non-recurring revenue is that it’s always a guess as to whether a customer will come back. In fact, I would go so far as to say that this revenue model has a less-than-complete definition of the word “customer.” A customer at a retail store, for example, is technically a customer between the time she walks in the door (or visits the website) and the time she exits with her purchase.She’s a customer of that store again only if and when she chooses to go back.
In a recurring-revenue world somebody subscribes or signs up for a service and becomes a customer in perpetuity, maybe even within a contractually defined time frame. So the definition of customer has more meaning in a recurring-revenue world than in the world of non-recurring revenue.
Aria Systems is a centralized payments hub.What exactly does the solution include?
Brendan O’Brien: We provide a full management solution to handle the entire life cycle of a recurring-revenue business. Itincludes all the components of billing but also includes onboarding, customer care, up-selling, down-sizing, cross-selling, cancellations, outbound notifications, determination of charges owed, presentation, etc.
Aria is a true multi-tenant SaaS model as opposed to a managed hosted on-premises system with a Web services layer slapped on top of it. It is a natively built SaaS system, which sits on top of payment providers, and we’re payment-processor agnostic.
We just closed a funding round for $40 million led by Bain Capital. They’re a smart bunch of guys, and I mention this to illustrate the growing importance of this market.
One of the things that Aria is about, culturally and technologically, is making sure that the toolkit that we provide for system integrations goes above and beyond the toolkits of other companies. In order to play nicely in an ecosystem with a lot of other players, we baked into the DNA of the Aria system a push-based active event model. This means that things that happen — such as a new customer signing up or the company issuing a credit to a customer — are pushed out to any and all external systems that need to know about it.
Our push-based event model, coupled with an API, allows for integration that’s inherently able to be tighter than any other purely API-based integration. It’s a sea change away from a pure API integration. This is a significant risk-mitigation tool that prevents fragmentation that can negatively impact customer satisfaction. Our push-based event functionality was baked into our product at a very low level from its inception, so it provides greater latitude than other companies that are now starting to layer this functionality on top of their products.
I assume Aria’s service includes consulting, right?
Brendan O’Brien: Very much so. A huge percentage of our team is devoted solely to advising customers in all industries on how to migrate from a world of non-recurring revenue.
In what way do you think this industry or service is going to evolve over the next two years? Will it change a lot during that time?
Brendan O’Brien: It’s an immature vertical today, and it certainly will mature a lot over the next two years. There will be some consolidation and some winnowing. This industry currently has a lot of players. They currently range from very simplistic, low-end payment-management solutions that offer a small set of functionality but in a simplistic way, up to higher-end systems like Aria that handle very complex billing and deliver broadly featured solution sets for issues inclusive of billing and as adjuncts to billing.
I think we’ll see a wave of companies in the payment space adding general ledger, taxation, end-user self-service portals, etc. to their billing services. And there will be a wave of companies, like Aria, that endeavor to be part of a best-of-breed ecosystem. Aria hooks into the expertise of taxation accountants and lawyers, Salesforce for CRM, etc. Part of our business is to make sure that we always grow a very large library of integrations to other best-of-breed systems.
Let’s talk about the consolidation of the vendor landscape in this space. Do you think it will happen along industry verticals, or will it be some other aspect?
Brendan O’Brien: I don’t know. But I think that the businesses that are best positioned to become consolidators are businesses like PayPal or even businesses like LevelUp — intermediary businesses that sit on top of payment instruments like credit cards and act as an aggregation point for payments.
I think that as consumers sign up for more and more things on a subscription or consumption basis, people will find it difficult, for example, to manage 400 swipes against a credit card each month versus 40. So consolidation is a natural evolution of an ever-maturing recurring-revenue market.
Doesn’t that cut out the opportunity for cross-selling and up-selling that would come with vertical consolidation?
Brendan O’Brien: A consumer is unlikely to be a consumer of more than a couple of players within a given vertical. They might get one to three entertainment services, one grocery delivery service. But the consolidator can also cross-sell its customers’ products/services to consumers along the lines of related activities.
For instance, related activities could be based on buying habits, card declination rates (people that have their cards declined frequently) or the number of dollars someone tends to spend on subscriptions overall. If you’re an adopter of subscriptions, that could make you attractive to all sorts of businesses. All of a sudden the Wine of the Month Club might be interested in you.
If a company decides they want to change their business model to have recurring revenue, what do they need to do in 2014 so that they will have this revenue in the next couple of years?
Brendan O’Brien: I’d like to answer by saying what they should not do. They should not assume that their quote-to cash (order-to-cash or prospect-to-cash) process is directly applicable into the recurring-revenue world. That is the mistake we most commonly see when companies migrate into a recurring-revenue model. They assume they can basically plop their quote-to-cash process on top of recurring revenue and that’s recurring-revenue management. But that’s transactional management and a very insufficient view of recurring-revenue management.
Sure, there are repeated transactions inside of recurring revenue, but the focus of recurring-revenue management is about customer retention. So the number-one thing we believe companies need to guard against is fragmentation. By that we mean multiple systems are at play (a billing system, a system for the actual service that you deliver, an end-user portal for using your service or changing their service, general ledger, taxation, payment processors, etc.), and these systems need to be very tightly synchronized. Otherwise, it can degrade customer satisfaction, which will put pressure against customer retention and also increase costs.
One of the problems with SaaS and cloud, in my estimation, is that a lot of people believe it’s sufficient to go to market with a UI / API. But an API is inherently a passive instrument. It waits for some other system to tap it and ask a question or feed it something. Although that’s important, it’s insufficient for full management and a focus on customer retention.
Brendan O’Brien is a co-founder at Aria Systems and the inventor of cloud billing. It is fair to say he introduced the world to cloud billing and innovated database-driven, enterprise-grade Web applications — before the concept of “cloud” was even on the horizon. O’Brien is at the forefront of the recurring-revenue revolution that is empowering enterprises and specifically enabling information systems and new business models to secure predictive revenue streams while improving business processes.
Kathleen Goolsby is managing editor at SandHill.com.