A virtual working session was held with Institute members on March 12th. Frank Ernst, VP, Subscribed Strategy Group, Zuora, and Bibhudatta Dash, Practice Expert, McKinsey & Company led the session which drew executives from Cisco, Nokia, GoPro, LinkedIn, Palo Alto Networks, Bank of America, and several other subscription businesses.
The conversation focused specifically on the opportunity to cash cycle—opportunity to contract, contract to invoice, invoice to cash, the customer lifecycle activities that follow—and how this is different and more complex for subscription businesses.
Amy Konary, Chair of the Subscribed Institute kicked off the session by explaining that “moving to a subscription, particularly in the software industry, is not simply about changing a financial arrangement. It’s about increasing value for customers through relationships. Customers expect ongoing value, anytime/anywhere access, on-demand fulfillment, personalization, and customization in exchange for their subscription relationships. It goes way beyond simply being a new way of buying.”
The interactive working session focused on business imperatives for CEOs and CIOs seeking to grow and scale their subscription business:
Ernst said that the team worked on this framework keeping the CEO persona in mind. “CEOs are most concerned with building innovative services, getting their new services into the market, and then making sure that they can grow the relationships that they have with their customers. If you look at this framework as bookends, we think about opportunity to contract as a big area of focus on one side – how do I want to bring these opportunities forward? How do I engage my channels, either by direct sales team or channel partners, in this? And so on. And then at the other end is the customer lifecycle, especially for companies that are new to subscriptions, it presents another revenue opportunity to be able to go cross-sell and upsell,” he said.
Ernst also stressed the importance of understanding the lifecycle elements as a continuum which are going to need to change as the subscriber relationship evolves. “A mature subscription company will want to drive to 30-40% of revenue from its existing customers. Since your existing customer base could be a significant portion of your revenue, you need to be thinking of them as the center of your universe. You need to always keep in mind that you’ll go back to them for renewals, upsells, and cross-sells,” he said.
Dash agreed and said “Some of the research that we have conducted on this topic shows that the cost to acquire a new customer is 10X that of renewing an existing customer for the same ACV. So if classic wisdom was that it’s 7X, we’re seeing that get further exacerbated in subscription businesses.”
Looking at O2C transformation from a CIO perspective, Dash shared a schematic IT architecture for subscription businesses. “Subscription services have to start with the customer. You have the access layer for identity and access management, asset service or the core services, your Q2C ecosystem, and your IT foundation. This is the building block for subscription businesses. But what distinguishes the best subscription companies from the rest are five distinctive IT capabilities,” he said.
The five critical IT capabilities are:
Some other topics that were discussed during the working session include the implications for hardware companies moving to subscriptions, channel or partner sales and their impact on the O2C process, and the impact on contractual structure and cash flow when transitioning from a perpetual license to a recurring revenue model.
The Subscribed Institute and McKinsey & Co will publish the final research later this year. If you’re a Subscription Economy executive interested in joining the conversation, click here to request membership. And click here to read the latest research from the Subscribed Institute.