How modern CFOs are revolutionizing business decision-making with back office, subscription metrics

How modern CFOs are revolutionizing business decision-making with back office, subscription metrics

This piece was originally published in Global Banking and Finance Review

The finance function has come a long way from the days of solely “closing the books.” New technology, namely automation, along with market uncertainty amid the current pandemic, has ushered in the modern finance era. In fact, our recent State of Finance Amid COVID-19 report found 80% of finance professionals have been very or somewhat involved in their company’s internal and external response to today’s pandemic. Now, finance leaders, with the help of data-driven insights, are serving as strategic advisors providing confidence to the C-Suite on go-forward plans.

The CFO is now steering the ship, and it wouldn’t be possible without drawing metrics through automation and cloud-based technologies. The same survey found nearly 50% of finance professionals said that finance automation technology has helped their business handle the financial changes brought on by COVID-19, with Ecommerce Platforms (36%), Subscription Billing Software (25%), and Tax Compliance Technology (18%) identified as the most helpful technologies.

With the rise of the Subscription Economy, more and more companies are looking to finance teams to help drive a new kind of customer experience – the recurring bill. In fact, data and insights around customer usage gleaned from finance can lay the groundwork for new services, pricing and packaging experimentation, and more. Simply put, today, the insight gathered from recurring revenue is driving the subscriber experience.

Subscription insights to inform business strategy 

Investors are taking notice of how subscription metrics can help to inform business strategy, with subscription data increasingly being discussed on earnings calls. For example, IBM referenced that their subscription business would be among the last of their businesses to be impacted amidst economic uncertainty during their Q1 2020 earnings call. Using subscription metrics to create a future-looking lens can give you the insight needed to make critical business decisions.

So, why are so many companies still missing the most important signal of customer loyalty – their finances?

Companies spend millions on product-focused marketing, yet forget their revenue is an essential customer experience touchpoint and should be analysed as such. You can find all the signs you need to understand your customer by analysing revenue trends. In subscription models, revenue is a signal that changes constantly, whether it be through upgrades, downgrades, suspensions or resumes, and should be used as a predictor for behavioural change.

Most often, the problem lies in the service architecture. Many companies are missing an orchestration layer between their CRM and ERP that enables them to listen and act on revenue changes in real-time. This means they’re not agile enough to shift alongside changing consumer needs. For example, a fitness studio can’t quickly spin up new monthly service offerings to fit with the ever-shifting local lockdown laws if they can’t access and act upon data trends in relation to their revenue.

In the current climate, only those who can quickly and constantly iterate their subscriber experience through unlocking revenue insights, namely through automation, will have any chance of succeeding. And this all begins in the back office, with the CFO.

Three subscription metrics for CFOs to watch

Whilst subscription-based companies have a wealth of customer data at their disposal, these insights can be hard to action if you’re new to the game. Those with subscription offerings should be using their data to track the right KPIs to drive growth, but this requires a standard, verified set of metrics. Traditional Generally Accepted Accounting Principles (GAAP) practice can’t measure the value of recurring revenue because subscriptions are forward-looking and often accrue over the life of the customer. So, a new set of metrics is needed to fit the modern subscription business model.

  • Net Retention Rate:  Zuora looked at data from 17 public companiesto identify what there is to learn about retention from today’s leading subscription companies. The research found that median net retention stands at 100 percent, meaning that the median company gains at least as much recurring revenue as it loses from each cohort of customers over time. Yet, the top half of companies in net retention grow at nearly twice the rate of companies in the bottom half, thus net retention is one of the key ways in which hyper-growth companies become hyper-growth companies.
  • Recurring-to-Consumption Billing Ratio:Zuora’s Subscribed Institute found companies leveraging a combination of recurring and usage pricing grew 30% faster than those who don’t have usage pricing. It’s critical for growth to monitor this metric and identify areas to consider utilising usage-based pricing.
  • Net Annual Recurring Revenue Changes: According to the Subscribed Institute, recurring revenue is the single most important metric for any subscription business. It’s important to monitor recurring revenue changes across the following categories: new, contraction, expansion, and churn. Then, factor in discount charges to get a complete picture of the transactions driving growth in your business.

The business environment in 2020 is more competitive and dynamic than ever. As markets shift daily and uncertainty looms, businesses need to be agile to keep up with changing consumer needs and spending habits. Only through leveraging cloud-based and automated technologies to gather invaluable insights on customer spending will businesses remain agile and future-proof. The subscription model offers CFOs the right metrics to answer both the why and the how and make decisions that will drive growth and retention.

For more Subscription Economy insights, sign up for Zuora CEO TIen Tzuo’s weekly newsletter, The Subscribed Weekly, delivered to your inbox every Saturday. 

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