RECURRING REVENUE OPTIMIZATION: THE BASICS

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1 1 RECURRING REVENUE OPTIMIZATION: THE BASICS

2 2 2 AUTHOR Matthew Shanahan - ServiceSource The goal of recurring revenue optimization is selling the right subscription at the right time for the right price, but you have to know how to find the sweet spot to succeed. This guide will show subscription business owners the metrics you need to watch to optimize recurring revenue and find your ideal revenue yield ratio. It also provides insights into metrics that can alert you to when a customer will stay or churn. Because the Subscription Economy is built on sustained customer relationships, the longer and stronger you can build these relationships, the more successful your business will be. Adobe Systems and Workday are just two of many companies that are proving to be masters of maximizing long-term relationships, known as customer lifetime value (CLV).

3 3 3 Adobe has seen incredible growth in its subscription-based business that includes popular software like Photoshop and Illustrator. In just three months, its paid Creative Cloud subscriptions increased 464,000 and now total 2.3 million. Another winner is Workday, whose HR software subscriptions continue their meteoric success, posting revenue of $159.7 million in Q1 fiscal 2015, a rise of 74 percent. Like the gas gauge in your car, user metrics give you critical signals about your customers, signals you need to monitor to get where you want to go. A customer s usage, for example, can tell you how much they value a product or service product. If they are frequent users, that offers an opportunity to upsell. If analytics show you that they aren t logging in, you need to help them sign on to your site more (or risk losing them). By analyzing these types of metrics, you ll be more able to accurately align and tweak product offerings and generate optimal revenue.

4 4 4 Take a look at your customer base, which is loaded with revenue opportunities. Notice customers extracting phenomenal value who are ready for an up-sell. Look for customers receiving good value who are excellent candidates for buying more products. And also pay attention to the customers who are getting low value and are most likely to hit the road. To grow, you must take advantage of all the revenue opportunities in your customer base and use that knowledge to launch upsells and cross-sells. Predict and target revenue opportunities within your customer base Optimize product packaging and price Maximize customer lifetime value.

5 5 5 REVENUE YIELD DEFINED In the Subscription Economy, revenue yield is the ratio between subscription price and value delivered, and it provides insights into revenue opportunities. It measures the return customers receive from use of their subscription, just like a price/earnings (P/E) ratio in investing. When the ratio is too high, customers defect because the price relative to return is too high, analogous to when investors don t buy when the P/E is too high. When the revenue yield is low, customers are more likely to buy, just like a low P/E entices investors to buy.

6 6 6 REVENUE YIELD DEFINED Price 5,000 4,000 3,000 2,000 1,000 Subscription 1 High Yeld Subscription 2 Low Yeld SOURCE: Scout Analytics scoutanalytics.com/research Usage Yield allows a subscription business to understand customer purchase behavior and revenue opportunities. If the price per minute of the cellular plan is too low, the cellular company is leaving money on the table. If the price per minute is too high, there will be customer churn and revenue loss. To find the yield sweet spot, a subscription business needs to measure value delivered, which can be found in usage data. For example, cell phone companies track their customers minutes, text, and data. Single sign-on providers measure number of logins. Streaming media services track how many videos have been watched.

7 7 REVENUE YIELD AND OPPORTUNITY Analytics allow a subscription business to calculate yield and find the correlations between usage and purchase behavior (whether that is churn, renewal, upsell or crosssell), and how that might vary by customer segment. This is invaluable in predicting revenue opportunities. For example, when yield is too high (low usage compared to high price), the subscription is over-priced compared to customer usage, meaning there is a churn risk. When yield is too low (high usage compared to low price), the subscription is under-priced compared to customer usage, meaning the customer is receiving great value and is more likely to be upsold. Growth can come when revenue yield is low (the customer is getting good value and wants more), and churn occurs when the revenue yield is high (the customer is not getting good value for the price paid).

8 8 8 CORRELATING RENEWAL BEHAVIOR Price 5,000 4,000 3,000 2,000 1,000 Subscription Termination - $4,200 / Active user Decrease Seat Purchase - $3,000 / Active user Same Seat Purchase - $2,300 / Active user Increase Seat Purchase - $1,500 / Active user Usage A real example from a SaaS company shows how the yield can predict revenue opportunities. In the SaaS example above, the most important usage metric was active users. Other SaaS companies have used number of transactions or number of artifacts, but in this case the right metric was number of active users. Figure 2 illustrates the correlation of customer renewal behavior to yield. Revenue growth came when yield was too low (i.e., customer is getting good value and wants more), and revenue churn occurred when the yield became too high (i.e., customer was not getting good value for the price paid). SOURCE: Scout Analytics scoutanalytics.com/research

9 9 UNLOCKING YOUR CUSTOMER DATA Many organizations rely on the experience and intuition of their account management, marketing, and support teams to assess value and find revenue opportunities. They may create programs and spend resources canvassing customers to ensure that they re happy, but this approach has limitations. Surveys are cheap, but few customers complete them. Though managers can gain some insights from querying customers, they can t reach enough of them to make the process cost-effective. Finally, you can t always trust the accuracy of surveys that are completed. How many times have you seen a customer say they re happy and then split soon after? Data, on the other hand, offers more accuracy and a closer measure of customer satisfaction. It will show you what a customer actually does, versus what they say they do.

10 10 10 Customer data offers a goldmine of information for your subscription business success, and provides insights on customer retention, churn, and renewals. It s essential for lowering your churn rate, or the percentage of customer revenue lost every year through subscription cancellations. Even small changes in your company s churn rate can have a dramatic impact on growth over time. An excellent revenue forecasting tool, it can tell you the minimum amount of new business you ll need to keep your company afloat.

11 11 THE CHALLENGE OF INTEGRATING DATA It s clear that embracing existing data is the most accurate, scalable, and cost-effective solution for the subscription economy. Understanding yield allows your business to offer the right subscription, to the right customer, at the right price, at the right time. Unfortunately, most companies lack the advanced data integration capabilities needed to make it possible. For many, usage data is captured and stored in a system separate from the subscription system, forcing internal IT resources to create a custom code and manual procedures to transfer data that is constantly shifting. Implementing a data integration strategy that is flexible to change is critical for success.

12 12 Three critical tools for data integration success: The ability to import and link historical data so that you can begin analysis quickly rather than waiting for more data to arrive. The ability to collect and integrate usage from multiple channels such as online and mobile so that you can create a 360-degree view. The ability to keep usage data in its temporal form, to be able to time series analysis correlated to Annual Recurring Revenue (ARR).

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