How top technology companies fuel growth
Whether it’s funding new investments, finding competitive advantages, or attracting and serving customers better, achieving growth in the tech sector is a must.
Fortunately, the “everything-as-a-service” (XaaS) economy and the consumerization of IT have offered a plethora of growth opportunities. But with opportunities come challenges. Today’s tech companies need to manage new business models, adapt to changing customer demands, and evaluate their systems and processes to support these initiatives. Having the right metrics, taking swift actions, and using the proper systems are imperative to success.
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Based on our experience working with some of the most successful tech companies, including Salesforce, Splunk, and Red Hat, here is some strategic guidance to help you maximize growth and prosper.
Opportunities
The demand for software-as-a-service (SaaS) grows every year. A Deloitte survey conducted in 2018 revealed the vast majority of CIOs (93%) had either adopted or plan to adopt SaaS, with over half saying they expect to use cloud software for their most crucial apps by 2021. According to Gartner, 70% of organizations have deployed or are considering the deployment of subscription services. Plus, the market for subscription-based software is expected to grow at a compound annual growth rate (CAGR) of 21.2% through 2023. If you haven’t started developing product strategies around these models – including the systems and processes to manage them – the time is now.
These models put even more attention on customer retention – which can also quickly translate into more opportunities for your business. Studies by both Bain & Company and the Harvard Business School have shown that just a 5% increase in customer retention spend can increase profitability by up to 95%. A key factor here will be having the right metrics and customer visibility to make customer retention seem easy.
Overall, it’s a great time to be in the “as-a-service” business, but you’ll have some new elements to deal with as you add these models to the mix.
Challenges
Billing: Since the subscription model is still in its infancy, many finance and accounting systems do not support subscription pricing. This means your finance teams may end up using spreadsheets or custom apps for billing or even financial reports.
Revenue recognition: Once the invoice goes out the door, regulations such as ASC606 and IFRS15 need to be adhered to. In addition, as the volume of invoices goes up, managing deferred revenue and cost amortization offline in a spreadsheet becomes a tedious task, fraught with potential errors and risk to the company.
Customer retention: Subscription revenues are inextricably linked to customer satisfaction and retention. Tech leaders now face complex analytical tasks, such as identifying factors that predict customer churn and estimating the ROI of sales and marketing strategies. At the same time, your finance team must play a customer-facing role, ensuring that invoicing and payments are easy and straightforward.
Service delivery: For those organizations providing services to implement projects, having a predictable services revenue stream is key. Inefficiencies in managing resources, hitting utilization targets, or tracking revenue leakage through spreadsheets can all have a direct impact on the bottom line and affect the predictability of services revenue.
Strategies
Understand your pricing models, understand their profitability.
Traditional software companies may sell licenses that last for years or even forever. This means customers buy once and don’t come back unless you can offer something new. Subscription pricing, on the other hand, allows software companies to earn recurring revenues from the same customer without having to invent new products. Subscription-based companies typically offer two main types of pricing models:
- Usage-based pricing, which fluctuates from one period to the next based on the consumption of bandwidth, data, etc.
- Recurring flat fees, in which customers pay the same fee per period for a defined level of service.
Other variations on subscription pricing include “freemium” models, in which customers receive basic features for free and pay to unlock new functionality, and hybrid pricing, which combines a flat fee with a consumption fee once usage exceeds a predetermined level.
It’s important to analyze the success of your company’s service offerings and pricing models. If margins are very low, your business may be offering too much for too little.
Track customer-centric metrics.
Subscription revenues are different from perpetual revenues. Most of your revenue will come as recurring monthly payments rather than lump-sum payments. In other words, each customer relationship generates a revenue stream.
Important metrics for tracking these customer relationship-driven revenues include monthly recurring revenue (MRR) and annual recurring revenue (ARR). Improving these metrics typically requires reducing customer churn, increasing customer retention, and/or increasing new business through add-ons and cross-sales.
Another important metric is lifetime value (LTV) of each customer. Most firms have their own unique formula for calculating LTV. It may include assumptions about how likely customers are to renew, and it may vary across customer types. Once you have reliable customer LTV estimates, you should compare them to customer acquisition costs (CAC). If your CAC is higher than your LTV, your business model may need to be adjusted.
As a tech leader, you need to ensure your team is tracking the most important metrics for your company’s growth and not just the ones that come standard with traditional ERPs.
Proactively improve customer retention.
Smart organizations now use predictive analysis to model promising new customer engagement strategies, and they are proactively improving customers’ interactions with billing and other financial functions.
Support customer retention by:
- Streamlining new customer onboarding
- Giving customers self-service options for paying invoices and making inquiries. By making it easy for customers to pay, you can reduce DSO.
- Communicating with sales, service, and other teams—and giving them greater visibility into finance activities—to avoid overwhelming customers with requests
- Creating predictive models for customer churn that help estimate the effects of new pricing and service models on customer retention rates
You’ll need to understand all elements that can affect the customer experience—both directly and indirectly—and do everything possible to make it better.
Ensure back-office systems, processes, and tools can support your business model—and provide the analytics you need for effective business planning.
Because subscription models are a fairly new phenomenon, traditional ERP systems do not support accounting and financial projections for usage- and subscription-based pricing. Additionally, calculating deferred revenue recognition (per ASC 606 and IFRS 15) with subscription-based income can be complex.
Often, SaaS companies use a third-party software package or spreadsheets for analysis and forecasting, which leads to inefficiencies and risks. For example, you won’t have a master customer record, making it difficult to get a complete picture of each customer’s activities. This means executives can’t access real-time reports because your team will have to pull data from multiple systems and normalize it before running reports.
With a single database spanning all your applications, your team can generate company-wide reports in real-time and see the complete history of every customer relationship. You also reduce the risk of inaccurate reporting—or even compliance issues—caused by missing or incorrect data. Because your team won’t have to synchronize data, they can spend more time uncovering strategic insights.
With Certinia ERP, a suite of solutions that includes Accounting & Finance, Subscription & Usage Billing, Professional Services Automation, and Revenue Recognition & Forecasting, you can support your business with one integrated platform. Certinia runs on the Salesforce platform, using the same database as Salesforce CRM to give you a “single source of truth” for your organization. And because these solutions are designed around the master customer record, you get a complete picture of customer touchpoints for your entire company. The result is better business intelligence in real-time, greater efficiency, improved compliance with finance and accounting standards, and less risk. From the services delivery side, you are able to optimize every aspect of professional services execution, leading to improved employee retention, boosted utilization, and reliably on-time, on-budget project delivery—all resulting in more predictable business.
As a leader at a technology company, you should take a close look at your current back-office technology and decide if it meets your business’ needs. If it doesn’t, consider the Salesforce platform with Certinia solutions, especially if you have Salesforce CRM.
You can download the Ultimate Guide to Certinia ERP to learn more about the solution and how it can help you fuel company growth.
If you want to see it in action, you can also check out this 2-minute demo video.
