Developments in technology, particularly the shift to the cloud, are helping drive business transformation. Many software companies that used to sell perpetual licences are now transitioning to a subscription-based approach. Instead of selling and installing a high up-front cost on-premise software solution with a support package, for example, under a subscription model, software can be hosted on the cloud and businesses are selling access to software through subscription.
Transforming to a recurring revenue business model has a transformational impact for both internal and external stakeholders. Consequently, strong planning and communication are vital in order to deliver an effective transition.
Firstly, it is vitally important that businesses frame this transition in terms of how it will benefit customers. In an increasingly competitive business environment, where deploying the best technology gives customers a competitive advantage over their peers, flexible access to the latest software at a low initial cost and risk is of great benefit.
Secondly, while there is no doubt that the recurring revenue model is attractive from an investor perspective as it can deliver higher lifetime value from the customer base, these transitions do bring short-term challenges.
Due to the loss of up-front revenue from initial licence fees, there can be a short-term impact on revenue and margin at the beginning of a transition. The impact of this needs to be clearly explained and put in the context of improved long-term margin and cash flow generation opportunity that subscription business models offer.
The CFO role is crucial to the success of these communications, which to be successful, need to be underpinned by accurate forecasting, analysis and reporting metrics.
Here are three key recommendations for a successful transition to a recurring revenue model:
#1 Get the right commercial proposition for the customer
It needs to be crystal clear why customers would want to buy a subscription over a perpetual licence. It must be evident what the benefits are for the customer with the value proposition compelling.
#2 Align the salesforce with corporate objectives
It is vital to make sure that sales incentives are aligned with the company’s strategy to drive the right behaviours. Transitioning from upfront licence fees, attracting large sales commissions at that point, towards a model which attracts much lower upfront revenue is a challenge and so remuneration structures need to be amended. Training around understanding and selling new product offerings is also essential.
#3 Build back office capabilities
Back office finance processes will see significant change and it is important to ensure that the business retains key staff and attracts new talent who can support this change. Processes relating to revenue recognition, invoice processing, renewal management and contracting models will change.
Potentially, there is a higher volume of transactions. The renewal process may need to be re-engineered, acknowledging when renewals happen now, and who is responsible for handling them. As business models continue to evolve, CFOs must be at the heart of the team developing delivery metrics and fresh ways of demonstrating business performance.
- It is important that businesses frame this transition in terms of how it will benefit customers.
- Due to the loss of up-front revenue, there can be a short-term impact on revenue and margin at the beginning.
- The CFO role is crucial to the success of these communications, which to be successful, need to be underpinned by forecasting.
- The renewal process may need to be re-engineered, acknowledging when renewals happen, and who is responsible for handling them.