If the pandemic taught the CFO anything, it's that businesses need to be prepared for anything. That is why finance leaders need to strategize a long-term approach to protecting revenue, jobs, and customer satisfaction and ultimately build resilience into their business models.
Despite recent inflation, market volatility, and recession warning signs, the subscription business model continues to be resilient. In the first half of the year, revenue growth for companies in the Subscription Economy Index was 9% greater than for S&P 500 companies. Customers are also holding onto their subscriptions, as churn continues to be lower than pre-pandemic levels. The Subscription Economy Index companies had (and took) the opportunity to nurture existing customer relationships to grow their average revenue per account (ARPA) over the past 14 quarters.
Often, the customer feedback that companies receive from recurring revenue models can help forecast future trends and shifts in revenue that can help inform long-term strategy development. Most importantly, feedback like that replaces guesswork with insights. Subscription revenue models allow for dynamic shifts in innovation and execution.
Know Your Customers
In a time of uncertainty and volatility, customers will continue to pay for services they deem valuable. Recurring revenue models can help businesses know when to put the right offer in front of the customer at the right time and lead to new and varied revenue streams.
By continuing to create value, businesses build customer loyalty, which can be crucial to minimizing churn and lost revenue. The “streaming wars” are an interesting case study in customer retention. Fierce competition has resulted in these platforms exploring creative ways to keep churn low.
From Netflix announcing ad-supported tiers to Disney+ bundling with Hulu and ESPN+, it’s clear that each platform is adapting offerings to reach and retain customers. And they have done so successfully — streaming platforms have some of the lowest churn rates across subscription models.
By continuing to create value, businesses build customer loyalty which can be crucial to minimizing churn and lost revenue.
Vacuum maker iRobot is another strong example. After launching a subscription offering around maintenance, such as regular filter replacements, customer feedback showed there was interest in subscribing to the vacuum itself. Now, iRobot Select offers a monthly plan that includes a robot vacuum, automatic delivery of accessories, a protection plan, a dedicated support team, and a new vacuum every three years. The program expands iRobot's available market with a new revenue stream.
Play the Long Game
In the eyes of finance, the best part of a recurring revenue model is starting a new year at first down and goal rather than needing to drive all the way down the field with a product-based model. Unlike traditional sales models where cash is more closely tied to when deals close, a recurring revenue model provides predictable cash flows by billing customers annually or quarterly in advance.
Revenue predictability is what I see as fueling the long-term growth of the subscription economy. Renewing existing customers is much easier than chasing new leads. Further, historical data can tell the company which behaviors lead to high lifetime value, who are the best upsell candidates, and who is at risk of churn. The result is predicting problems before they arise.
Recurring revenue models show their strength when CFOs balance long-term strategy while iterating for market turbulence.
This is how CFOs can play the long game with a recurring revenue model. Inevitably, though, there are going to be times when things get bumpy. But even those challenges shouldn’t change a company's long-term view of things.
Recurring revenue models show their strength when CFOs balance long-term strategy while iterating for market turbulence. Renewing existing customers provides a cushion of financial support, the ability to scale quickly is prevalent, substantial customer data identifies paths forward, and management can focus on long-term and lifetime customer value despite real-time economic volatility.
When a recession hits, the pressure for a business to provide true value for customers accelerates. Recurring revenue models remain resilient because they can give businesses the tools needed to develop long-term business strategies that promote customer loyalty and retention through good times and bad.
Todd McElhatton is CFO of subscription management software provider Zuora.