The Shift to Subscription Business Models Requires Digital Transformation

Subscription-based business models can drive increased revenue through a wider variety of solutions and pricing options for customers, more predictable revenue streams, and increased engagement with–and loyalty from–customers. But getting there will require a major digital transformation for many businesses.

by Tony Forcucci

What began as a genius move to make enterprise software more affordable threatens to upend the business practices of enterprises across almost every sector. In the nineties, companies like Oracle and PeopleSoft packaged a mix of software and hardware and licensed it to their customers on a per-seat basis. Salesforce famously pioneered a disruptive approach to pricing software.

The big idea—sell software as a service—meant that software could be priced based on *how* you use it: by the number of licenses, or which features, or even how much you used it. This novel SaaS approach eliminated the upfront hardware cost of ERP software; SaaS enterprise customers “rented” the computer resources they needed from datacenters.

This subscription-based approach made it possible for SaaS companies to innovate faster and compete with the established software providers by offering their products for a fraction of the price. It revolutionized how software and other services were sold. Two consequences emerged: for purchasers, software became an operating cost and not a capital expense; and for sellers, managing these business offerings and subsequently billing became much more complicated.

Today, we’re seeing this shift to an Anything-as-a-Service (XaaS) economy impact a wide array of industries and business sectors; thousands of companies are shifting from selling products and services on a one-time basis to a recurring-revenue business model. Buyers want more options when they acquire services or use anything—from software to copiers to medical equipment to vehicles.

As companies strive to adopt a recurring revenue approach, new and challenging demands are placed on their revenue operations, finance and accounting teams. There are five important strategies that can help them navigate and overcome the technical obstacles of this strategic shift to XaaS.

1.    Integrate order capture and contract management systems

While it's logical for sales and accounting systems to be integrated, most companies simply haven't taken this crucial step. Too often, a contract gets drafted and completed in the CRM system, and a PDF version of the contract is sent to the billing department. There, someone must manually enter relevant information into a contract management system. This leads to data-entry errors or missing information that can be critical to accurate billing. Tight integration between CRM and contract management closes gaps, eliminates errors, and accelerates the crucial process of accurate invoicing.

2.    Identify and standardize optimum models for contracts and pricing

In recurring revenue models, the volume of contract and billing data typically grows and accumulates rapidly. By analyzing that data you can simulate different pricing scenarios and structures to identify opportunities to improve sales effectiveness, visualize revenue projections, improve predictable revenue streams, and determine their impact on profitability. These analyses can yield important insights across an organization—from product management and customer service to sales and marketing—and they are the fuel for pricing and billing innovation.

3.    Orchestrate customer usage systems to prevent revenue leakage

Recurring revenue models employ pricing structures that involve usage data on everything from clicks to mileage to data consumption to kilowatt hours. This data originates from numerous types of IoT sensors, data services, software applications, machines, and other external feeds. The problem is that reports generated by these systems are usually in different formats and layouts. So you’ll need a data-mediation layer that can map the data, interpret the fields, aggregate different sources of usage data, and enhance it by reconciling different codes, IDs, keys, and labels. With a data-orchestration capability in place, you can capture all customer usage and translate it into a format that can be consumed by the billing system to prevent revenue leakage.

4.    Focus on consolidated invoicing

In an XaaS economy, it’s common for a customer to use multiple products and services in several regions and across different business units – potentially creating dozens of separate invoices for each billing period. But today’s buyers expect smarter and more comprehensive invoices; they will no longer accept invoices separated by individual product, service, or region.

For the seller, the challenge is to aggregate all invoices into a single bill run. Legacy systems may force the billing team to execute bill runs on a contract or amendment basis, which increases the time to bill and the time to deliver invoices to customers. By selecting a unified solution for recurring billing, you can consolidate all invoices into a single bill run, slash billing cycle times, and shorten cash cycles.

5.    Analyze — both for upsell opportunities and to prevent churn

The large volume of data associated with recurring revenue business models is an opportunity to analyze transactions and identify correlations and the propensity to buy. By sifting through customer buying behaviors and usage activity you can spot patterns that point to upsell and cross-sell opportunities, which in turn can increase your top-line revenue. You can determine revenue by product and fully understand your cost of sales. You can also detect products or services that are not selling as well or where usage is softening. With the right correlations, you can even predict which customers are at the greatest risk of churn and take remedial action in the form of custom outreach or targeted offers.

Invest in your monetization technology to power long-term growth

As companies embrace recurring-revenue business models, they will need a strategic plan to address billing capabilities capable of handling increasing transaction volumes and contract complexity. Perhaps for the first time, the finance department will be front and center in the company’s wider digital transformation strategy. And for a good reason: billing and revenue management capabilities that integrate, automate, and streamline order-to-cash processes can yield important benefits, including faster billing cycles, greater team efficiency, increased customer satisfaction, and greater insights to improve and extend revenue streams in the long run.