30-second summary:
Subscription sales is the new nirvana – almost every company wants to add on or convert to subscriptions
Most companies’ technology is not set up to allow them to do subscription sales
Simply buying new software won’t solve the problem
Think through the entire process and unify the front and back office to succeed with subscriptions
COVID-19 and its economic impact have sparked a massive sales transformation for many companies. They are adding on or boosting recurring revenues in order to create stability alongside growth. During the pandemic, we’ve seen this everywhere: local cafes selling subscription coffee plans, yoga classes via Zoom and car makers selling luxury add-ons via subscription. Even “old school” manufacturers have accelerated the trend.
For example, a tractor manufacturer selling a software package to help farmers improve crop yields. And so far, the big winners during COVID have been those companies selling products and services via subscription.
In order to manage the sales, production and delivery process from lead to revenue, most large companies use ERP (enterprise resource planning). ERP software manages contract configuration, finance, production and supply chain– the “back end”.
The most common ERP software include SAP, Oracle and Microsoft Dynamics. Companies also use customer relationship management (CRM) software, such as Salesforce, to configure, price and quote goods (aka the “front end”).
Typically, these two systems work well together. There is a clear handoff between the front end and the back end. But adding subscription revenues requires change throughout the front and back ends and how they connect.
In other words, you now need to build a Lead-to-Revenue system that is able to handle all of the ways you sell, serve, monetize and deliver to customers.
Another way to think of it is that in traditional companies, the front end and the back end are siloed. But that doesn’t work when you introduce subscription or recurring revenues into a line of business.
A subscription model requires a cohesive approach to both your business practices and your technology – serving as an orchestrator, defining a process that helps the front and back office work in unison.
Growth can create problems
Without proper forethought and planning, businesses that add on a recurring revenue model often follow a similar pattern.
At first, as recurring revenues are in their infancy, the inherent underlying issues aren’t readily apparent, allowing companies to use existing processes with some manual intervention.
Unfortunately, as the recurring revenues grow, those manual fixes become unsustainable, resulting in errors and the need to add headcount. Businesses must support complicated calculations during the quoting process and enable contract alterations such as upgrades, add-ons and swaps.
Existing processes and tools across Sales and Finance, which will now rely on manual intervention, cannot support the volume of activity, and create a ripple effect across service, delivery and the customer experience.
The process then becomes inefficient and costly, hitting revenues and eating away at profits. What worked to drive business forward can become a hindrance. The only way for the recurring sales to grow profitably is look holistically at both business process and technology transformation
In a typical, more predictable business environment, it might take years for companies to get to this point, but COVID-19 has accelerated the process.
Businesses experiencing strong growth now face the very real risk of eroding critical profits through disjointed processes, tools and technologies across the front and back office.
Sales transformation isn’t enough
Unfortunately, when companies think about transformations like this, they tend to see this as only a problem with their sales process. They often believe buying a new software system will “fix” sales.
As a result, they fail to work through the impact recurring revenues will have on their company’s full business operations – especially finance.
That oversight can add to an already costly project. Companies that want to transform business processes to manage recurring revenues must create a new handoff between CRM, CPQ, contract life management (CLM), billing and ERP systems – and that can be very tricky.
In a recurring revenue model, the sales process does not end when the contract is signed. That means you cannot simply hand the sale off to your ERP system, which is how most sales processes are configured today.
Billing is also more complex, so CRM systems must allow for contract changes, upgrades, add-ons and swaps – something that isn’t possible when back office and front office systems are siloed.
For instance, you sell a piece of machinery for $1 m. The sales team, working in its CRM system, configures and prices the package and hands it off to Finance to create contracts and invoices.
The buyer also wants a $1,200 yearly contract for software that allows the machinery to communicate with other applications in the factory. But if a half a year later, the buyer wants to upgrade to a newer version with more functionality, is your system equipped to handle that?
Thinking through the whole process
The most important thing any company can do is have a good think about the entire process – not just sales. However, what often happens is that the company simply tacks on a new piece of software, in either the front office or back office, designed to handle subscription sales. That is unlikely to fix the problem.
Instead, the company should think about two things: First, how do you avoid the pitfalls that will lead to performance erosion and economic decline; and second, how do you optimize across the entire business to maximize the recurring revenue opportunity.
The answer for both? Companies must modernize lead-to-revenue operations across the front and back office to boost growth and efficiency and create a better, stronger customer experience. The new model has to be dynamic, unifying and customer centric.
Unlike a one-time transaction, recurring revenue is based on an ongoing, evolving relationship.
The recurring revenue architecture must be flexible enough to support customers no matter where they fall on the continuum, from premium subscriber with constantly changing add-on services or upgrades, to one-off sales.
Making it work for the customer
Customers expect subscriptions to be easy and fluid. They expect to be able to change or cancel at any time. Therefore, you have to work harder behind the scenes to keep them happy. Your sales and billing processes must be designed to simplify the customer experience and reduce friction.
Change like this will require the support of investors, employees, partners and others important to your success. The benefits to employees, who will be asked to make many changes, and investors, who might be concerned about cost and risks, may not be obvious.
Ultimately the toughest sell will be to customers, who must see the benefit of change and feel better served, not taken for granted.
This will require strong coordination and a shared vision between all areas of management and staff but can lead to significant process optimization throughout the business, from marketing and sales to contract management, renewals, legal and customer service.
As high-growth organizations address market opportunities, they must recognize the symbiotic relationship between the front and back office. Selling, serving, delivering and managing are all related and interconnected within the customer journey.
Companies that understand this and take the critical step to develop a cohesive and effective lead-to-revenue strategy, will be best positioned to operate a successful and profitable recurring revenue business—in the COVID-19 age and beyond.
Sean Joyce is currently EVP of Technology and Strategy at Navint. Based in Chicago, Sean is an expert in cloud technologies and has spent the last 10 years helping companies make the transition to recurring revenue both as a client advisor and as a marketing, product, and implementation leader for leading software companies including Salesforce, Apttus, and Zuora.
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