Prior to her position as CFO for Palais Park Investments, Marisa Massie held a number of finance leadership positions (including controller!) at companies like Salesforce, Bazaarvoice, and AlienVault. In this guide, she explores how the Subscription Economy is changing the role of the financial controller, giving controllers more opportunities to take on new responsibilities and deliver greater value to the business.
Accounting, financial planning and reporting, internal controls, financial analysis…these are the typical areas of responsibility of a financial controller.
And, at first glance, you might expect a controller’s responsibilities to be the same regardless of whether you are at a traditional product company or a subscription-based company. But take a closer look.
In a subscription-based business, the controller has a much broader focus, and is involved with a variety of functional areas beyond finance. Because of the nature of subscription-based businesses, the controller takes on a dynamic, forward-looking view of the business instead of the traditional backward-looking balance sheet perspective based on historical data. In the new role, the controller can leverage the wealth of available real-time data to help the company shape the future.
While the role of the controller in a subscription company may be more complex in many ways, it’s also more rewarding. As the controller of a subscription-based business, you have the opportunity to deliver even more value to the business and engage in activities that are even more interesting than those associated with the traditional controller role. And yes, you still get to keep those traditional areas of responsibilities, but perhaps with a different focus in some cases.
This article offers insight into the new role of the controller in a subscription-based business. It also provides guidance on how you, as the controller, can help your company achieve greater success.
Top tip: Understand the impact of selling obligations versus selling products.
In a product business, you ship a clearly defined product. The customer receives the product, pays for it, and typically keeps the product for a number of years — perhaps beyond the entire product lifecycle. In this environment, you count products as you ship, and tracking revenue is straightforward.
In a subscription business, you are selling obligations. The customer pays upfront for the subscription period, but that payment is for services the company has not yet delivered. This deferred revenue is entered on the company’s balance sheet as a liability that the company must fulfill. Instead of tracking products sold, you are tracking obligations. As a result, your cash model becomes very disconnected from your revenue model.
The complexity doesn’t end there. In a subscription business, every order line can have its own path, its own success, and its own life. Here’s an example: Your company provides three services, but a particular customer wants only two of them. So you must disaggregate parts of your revenue model and treat the parts differently. What’s more, you have to cope with complicated accounting around other investments in the business such as deferring and amortizing the sales commissions and capitalizing the expenses to develop the software that runs your subscription platform. Dealing with these intricacies requires some very detailed tracking.
Unfortunately, enterprise resource planning (ERP) systems were developed for the product business model. They lack the processes and functionality to track the highly detailed and varied transactions that occur in a subscription-based business. Tracking deferred revenue and associated obligations is a good example.
Consequently, some subscription-based companies have developed their own processes and tracking systems using spreadsheets, stand-alone databases and a lot of manual efforts. The potential for error is high, which exposes the company to spreadsheet risk and can lead to expensive and embarrassing financial restatements. Fortunately, subscription management platforms are available to automate these processes and eliminate much of the manual effort.
Top tip: Focus on customer satisfaction to build a predictable and continuing source of revenue.
A major significant benefit of the subscription model is that a company can build a secure recurring revenue stream. As long as your customers remain happy, they continue to renew their subscriptions. The result is a predictable and continuing source of recurring revenue on which to build the business. That predictability can help in your planning and investment strategy as well as in reporting revenue and earnings guidance to the public stock markets, if your company is a public company.
The key is to keep your customers on board for the long haul; as a controller in a subscription-based business, customer satisfaction is the highest priority. If you previously were a controller in a traditional product company, customer satisfaction may not even have been on your radar. A product business may not focus on renewing or reselling customers until there is a new product, and the rate of a customer coming back to purchase a high-ticket item may be low.
But in a healthy subscription business, satisfied customers will continue to use their subscriptions, renew their subscriptions, upgrade their subscriptions, add features and new products, and more! And the process of going back to customers on a regular basis and asking them to continue the relationship provides a huge benefit to you, the vendor. Every time a customer engages with your service, your company has an opportunity to reconnect, encourage the customer to expand usage of current services, and sell new services.
To make the most of this opportunity, consider your customer base to be a network of people with whom you carry on a conversation every time they log into your service. Take advantage of this network to increase your company’s presence in other areas of each customer organization. Understanding your customers’ operations enables your company to provide solutions, not just a standard service.
Top tip: Usage-based pricing models translate into value which leads to increased revenue.
As the controller in a subscription-based business, you should be involved in establishing pricing and pricing models. To do this effectively, you have to know what you’re selling and how customers want to buy it. And you need to give your sales team the pricing flexibility they need to sign the customer, but not be so flexible that you are agreeing to bad deals.
In terms of pricing models, consider your customers’ requirements. Some subscription companies are moving towards a usage-based model. With this approach, customers feel that the vendor has “skin in the game.” The vendor recognizes that its offering delivers value and that customers will come to rely on that offering. And, as customers continue to derive value from the offering they will increase usage, which translates into additional revenue for the vendor.
This pricing model enables the company to increase revenue with usage and the related increased cost of services. In addition, you need to be able to contribute to signing on customers and helping them understand the pricing model. This may include having a conversation with a potential customer’s procurement team or controller to help them understand your offering and the ROI they can expect if they invest in it. Sometimes a “controller to controller” discussion makes all the difference.
Top tip: Create a viable commission plan that attracts top sales talent.
However you choose to structure your billing, you need to establish a compensation plan that takes into account both deferred revenue and the potential revenue stream. In a product business, salespeople are typically compensated for each sale at the time of product acceptance, when revenue is recognized. In a subscription business, compensation is based on the value of the contract which is initially deferred until service is provided.
Moreover, unlike a product business where each sale generates its full revenue upfront, each sale in the subscription-based business represents a new, continuing and growing revenue stream.
To attract top salespeople who are capable of accomplishing these goals, you have to offer a commission plan that compares favorably with those in a product business. To make informed decisions on the commission plan, you need to track metrics that go well beyond the traditional controller’s metrics. For example, the cost of customer acquisition must be compared to the estimated lifetime value of a customer, not just the first year contract value.
The value of a customer is not just the first year, but the continuing revenue stream from annual renewals. The longer the customer life, the more value that customer brings to you. You may consider paying commissions for a second year of a signed contract because you’ve secured that revenue and avoid the cost of ‘reselling’ or renewing.
But it’s not just about hunting for new customers. As mentioned previously, to achieve the recurring revenue stream, you need to ensure that customers are using your services and realizing value from it. You also need as many customers as possible to renew and perhaps upgrade their subscriptions. So it’s essential that your sales team have sufficient ‘hunters’ and ‘farmers’ who can focus on each of these objectives and, as the controller, you need to ensure the company considers both top priorities — and you need a way to appropriately compensate them for achieving in both areas.
Top tip: Maintain good governance around R&D investments.
The product team will likely have a continuous flow of great ideas for enhancing the service offering. But you can’t fund and invest in every great idea. It’s not just a matter of how much money you can afford to allocate to R&D. Developing too many different capabilities and services might actually confuse customers and leave you with a legacy of features that very few people, if any, use. Keep in mind that in the subscription model, whatever changes you make to your service affects every customer.
As the controller, you need to be judicious and maintain good governance around your development investments. What’s more, determining capitalization in a subscription company is especially difficult in that it’s based on internally developed software. Estimating its value can be highly subjective. The challenge is to apply relatively strict measurement criteria to some very creative R&D people.
There is also risk around determining the real value of assets that you build over time as you continually add features and functionality to your services. It’s often a challenge to connect the developers with the software code they created. Here again, the capitalization functionality of ERP systems is typically intended for product companies. This has forced subscription companies to develop their own capitalization tracking processes, often using spreadsheets and manual tasks.
As discussed earlier, these methods are subject to errors that can be costly and can affect your company’s reputation.
Top tip: Clearly convey which metrics are the best measure of success for your business model.
Investors want to be periodically updated on your company’s growth. The subscription model’s recurring revenue is a key metric and provides predictability. But many investors are looking for the type of metrics associated with typical product companies. However, these traditional metrics may not be the best indicators of the health of your subscription-based company.
Be prepared to answer investor questions and also to clearly explain why metrics associated with a product-based business aren’t the best way to evaluate a subscription-based business. You’ll want to educate investors on the metrics that are most relevant, such as recurring revenue, customer retention rates, and operating cash flow.
Top tip: Controllers need to see themselves as members of the customer success organization.
Establishing and nurturing tight relationships with each and every customer is crucial to the success of a subscription business. The controller can play a key role here by ensuring everyone understands how their role contributes to the big picture as well as the bottom line, and by becoming the voice of the customer.
To take on this expanded role, get out from behind your desk and work closely with other functional groups. Here are some of the ways to do that:
As you move from a backward-looking balance sheet perspective to a forward-looking view, you can take a leadership role in many areas to shape the company’s future. This new role is immensely rewarding. You become part of the ongoing business. You engage with a variety of functional areas across the business throughout the customer lifecycle. You have the opportunity to be creative, provide helpful insight, and add immense value to the business.