By David Zwick, Flexera Software
In technology companies, business success, growth and profitability depend on how products are brought to market and monetized. Technology companies, which offer Internet of Things (IoT) software and devices, are looking for the most efficient ways to innovate, expand into new markets, and secure valuable revenue streams.
Recurring revenue, which is worth significantly more than one-time revenue, is one of the best ways to increase revenue and overall business valuation. As CFOs strive to increase profitability and enable long-term investments, securing recurring revenue streams is a top priority. Making the Quote-to-cash (QTC) process (the full sales cycle) happen in a seamless and automated way is key to the goal and is based on offering customer-centric products that can foster customer retention and recurring revenue recognition for the supplier.
Finance leaders need to develop their “digital acumen” to support their strategic initiatives – “leverage technology and tools to focus on problem solving rather than data collection and reporting.” Adopting the right tools can drive innovation and success. Today, that means looking to the deployment and monetization models that deliver the best results for vendors and customers alike. This may require transitioning from on-premises offerings to software-as-a-service (SaaS) deployments while shifting from selling one-time perpetual licenses to recurring revenue models. CFOs need to understand how these approaches can benefit the bottom line.
The Value of Combining SaaS and Subscription
The SaaS deployment model is rapidly gaining popularity and is expected to account for 58% of total software revenue by 2025, according to IDC. With SaaS, the software provider provides the complete solution, hosts it and manages it, delivering it as a service to the end customer. The “SaaSification” of products helps the vendor, facilitating a recurring revenue stream, as well as scalable deployments. The customer benefits from the possibility of using the software, without costs related to hosting, maintenance or updates.
When moving to SaaS, the software vendor must have a recurring revenue stream to maintain the service. The subscription monetization model, which moves away from perpetual licenses, is ideal. The combination of these two flagship models, subscription monetization combined with SaaS deployment, benefits both the provider and the customer.
Subscription (also known as term licensing) is today’s leading software monetization model, as found in the Revenera Monetization Monitor: Monetization Models and Strategies report. It generates a regular, recurring stream of income, usually billed annually in upfront installments. The industry standard in B2B scenarios is often a three-year contract; it may be shorter in consumer use cases. Contracts with longer runtimes already incorporate renewal for consecutive terms, making the recurring revenue stream even more powerful.
Subscription is a simpler model than other recurring revenue monetization models, such as results-based (charged based on measurable customer value) or usage-based (based on actual software usage). As vendors, technology companies have the advantage of a stable and predictable revenue stream, which supports business valuation and strengthens the company’s ability to invest in its product. SaaS deployments also make it easier to measure and track customer adoption and engagement trends, allowing providers to proactively support and build customer relationships for ongoing subscription renewals.
Subscription also attracts buyers, as it lowers the barrier to entry of a product. Customers have the benefit of being able to try out the technology (and adjust their purchases to meet changing usage needs) without a massive upfront investment, and being able to purchase the SaaS as a OpEx, not as CapEx (as is often the case with perpetual licenses). licenses), expenses. Meeting customer needs is a key way to build customer loyalty, one of the most important conditions for ensuring that customers will renew their subscriptions and that revenue will be truly recurring.
Ease the move to SaaS and subscription
The transition to SaaS and subscription requires organization-wide efforts, not only to improve the entire end-to-end QTC process, but also to secure recurring revenue. CFOs should take an active role – in partnership with other finance, account management, billing and accounts receivable, fulfillment, product management and sales teams – to have a clear understanding of the financial implications , advantages and functionalities of this hybrid approach.
- Track metrics to support the transition: To move away (in whole or in part) from the perpetual license (with revenue recorded in advance), be sure to track several metrics. Annual recurring revenue (ARR), the sum of all subscription revenue in a year, is the most critical metric for subscriptions. Annual contract value (ACV), billing, customer acquisition cost (CAC), customer lifetime value (LTV), and revenue retention are also critical.
- Focus on customer orientation: To ensure that LTV is always superior to CAC, CFOs must help align all roles across the organization with a focus on customer centricity. Provisioning, onboarding, analysis of account health and renewal risk, and renewals and upselling should all be considered from the customer’s perspective to ensure they view your SaaS as a true and valuable service.
- Focus on retention: Renewal rates and raw retention rates are the best indicators of customer health. Evaluate the retention rate by type of software or by product line, then in an aggregated way for the whole company. Retention can be measured in several ways, including gross revenue retention rates and renewal rate percentage (a measure of contracts that need to be renewed). Raw retention rates above 90% generally indicate healthy products and customer success.
- Align back-office systems to support the process: Ensure the organization’s systems including accounting system, customer relationship management (CRM), entitlement management, usage management and compliance management system work together to function properly from a business process perspective.
A successful Quote-to-Cash process is based on creating value for customers through continuous product improvement. As the pressure to secure recurring revenue streams continues, the transition to SaaS deployment and subscription monetization can provide the flexibility required to meet all parties’ goals. CFOs can help drive this beneficial change by understanding and embracing the tools available to them.
About the Author
David Zwick is Chief Financial Officer at Flexera Software.