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Demystifying recurring revenue: The new norm in subscription

(Image credit: Image Credit: MK photograp55 / Shutterstock)

Subscription-based business models have already outpaced traditional businesses in sales and services over the last few years, growing by more than 100 per cent per year for the past five years. However, with the market undergoing such a rapid shift, critical business decisions can no longer be made based on the metrics and methods of yesterday.

The concept of recurring revenue in the subscription model is both elegant in simplicity and profound in implication. First, recurring revenue by definition brings a level of predictability to the business, in turn allowing it to reinvest in growth. Also, second, the compounding effect of recurring revenue implies that subscription businesses that can retain their existing customer base grow at a faster pace than those stuck in traditional sales processes.

This shift in subscription sales, from purely customer acquisition and maximising one-time profits, to retaining customers and growing their lifetime value, has caused a need for data and analysis beyond traditional tools.

For example, monthly recurring revenue (MRR), the normalised monthly revenue that a subscription business receives from its customers, becomes a core driver of business decisions. Other foundational metrics while describing a subscription business include:

New MRR: Revenue from newly acquired customers.

Expansion MRR: Revenue growth from existing customers.

Gross Churn: Revenue lost due to customers cancelling or downgrading their subscriptions.

Tracking these metrics on a month-to-month basis provides visibility for prioritising and re-allocating resources between teams focused on the acquisition, customer enablement, and retention.

At Chargebee, we have worked with thousands of subscription businesses, spending the last six years helping our customers analyse and understand their data manually over thousands of spreadsheets. Along the way, we’ve been able to glean insights into the massive growth in the SaaS space, and its spill-over into subscription-based e-commerce companies that have led us to four core realisations regarding recurring revenue and the drivers and metrics that matter to subscription businesses.

Preventing leaks

In subscription businesses, every business function has a stake in recurring revenue. Gone are the days when finance is the only department concerned with revenue. Now, every role in the business is directly aligned to tangible revenue metrics. For example, sales and marketing teams require metrics on promotion success rates and new subscriber conversion, while customer success teams need ones related to churn and expansion revenue. This data allows business leaders to make intelligent decisions within individual departments to drive overall revenue, while also holding each department accountable. It can also help motivate team members and make them feel like they play an essential role in the growth of a subscription business, which, in reality, they do.

Businesses want to make faster, better decisions, not just get more data. While business intelligence tools stack on more and more data and visualisations, among users, there is an increasing demand for more tangible insights and fewer data points upon which that they can act. Whether in sales, marketing or product, users want data that will help them make faster business decisions by attributing activities to the right revenue driver — as well as knowing what query to ask in the first place. In this environment, traditional business intelligence is no longer good enough. Businesses now need to look at the right data through the right lens. All departments should reconcile disconnected data and tie it to revenue. This allows businesses to see how each specific business function can be optimised for revenue growth. When it comes to analysis, subscription businesses need access to critical insights from the components that drive revenue, including subscriptions, sign-ups, activations, customer churn and any other metrics they need for their day-to-day and long-term strategies.

Flexibility and customer experience prevent businesses from leaking revenue. At times, the gaps in a broken or fractured customer experience can be relatively small. For example, a customer may not be able to pause their subscriptions because it might throw off billing cycles. At other times, however, a lack of flexibility with customers can be a deal breaker. For example, some customers may cancel their accounts immediately — not at the end of a term — because the billing system doesn't support proration. Recurring revenue depends heavily on healthy customer relationships, and there is no place for inflexible subscriptions in a relationship economy. Providing a better customer experience that makes it easy for them to upgrade, downgrade or pause their subscription helps reduce subscriber churn. Offering an option to pause the relationship is better than completely losing a customer, and puts revenue in the pocket of the businesses in the long run. Further, offering a  trial and multiple pricing options that give customers even greater flexibility allows companies to get a sense of which types of options drive new subscriptions and retain current ones.

A growing ecosystem

Transactional data is closely tied with business metrics. Imagine issuing credit notes, or having to reverse a transaction — activities that require e-commerce companies to go back in time and correct the metrics for that period. Instead of using stale crunched data, new technologies today enable solutions that can provide a query layer to help capture revenue-centric data in real-time, as well as historic. This can include a summarised report of all transaction types, the average number of transactions that occurred in a day, a day of week or hour, and opportunities that have been lost or missed due to customers who tried to sign up but were unable. Subscription businesses require analytics that uncover the causality behind revenue, as opposed to proxies that traditional analytics provide.

The subscription model is here to stay, and we’re guaranteed to see the ecosystem grow around it with more solutions, services, and processes tailored to fit the needs of this changing business model. I for one am excited to see that the power and responsibility to grow revenue is being democratised across business functions, empowering all employees to see how their work contributes to revenue. That’s great for employees — and for the bottom line.  

Indus Khaitan, Chief of Growth, Chargebee (opens in new tab)
Image Credit: MK photograp55 / Shutterstock

Indus Khaitan is the Chief of Growth at Chargebee, bringing years of expertise in product development, technology evangelism and marketing. He co-founded BitzerMobile and was an advisor to Sequoia Capital.