The Third Cloud Solution for Customer-Centric Business Models

This is an adapted excerpt from an article originally published in S@pport.

Successful companies are transforming their business models away from one-off transactions to recurring models that build greater customer loyalty. However, ERP and CRM systems alone cannot manage these business models. What you need is a third cloud that sits between your ERP and CRM. FInd out why…

Knowing Your Customers Through the Subscription Economy

Since 2000, more than half of all Fortune 500 companies have disappeared. This massive disruption is a result of digital change that has led to business model changes across industries, from software and high tech to automotive, fitness, retail, and more.

In order to remain competitive in the digital age, companies need to better understand their customers through their usage and buying habits. To do so, companies are designing new customer-centric business models with the goal of building and maintaining continuous customer relationships.

This new, customer-focused business world is called the Subscription Economy. This term covers all business models in which monetization takes place via additional digital services, flexible subscription models, or pay-per-use.

In addition to these new revenue opportunities, these new recurring revenue business models enable companies to analyze the use of their products and services much more precisely and thus adapt them precisely to satisfy customer needs.

If you don’t know your customers yet, you can be sure that some other company already does! For example, About knows the mobility behavior. Gymondo knows fitness behavior. HBO and Netflix know what and how customers see and buy. Amazon, Zalando, and other brands know exactly what a customer is looking for before they even enter a store. The future direction of all business is customer-oriented and no longer product-centric.

Towards this end, there are three steps for companies to become more customer-oriented.
1. Record customer usage patterns and preferences to gain a deep understanding of your customer.
2. Integrate features into your sales model that are important to your customers, to encourage more engagement with your offerings.
3. Establish direct billing contact with your customers rather than handing over the billing relationship to a third party platform (e.g. Apple or Google).

The Challenges of Converting to a Customer-Centric Business Model

All companies trying to make the transition to a more customer-centric business model face the same challenges.

– It usually takes a very long time before they can offer customers new prices and packages which means they can’t keep pace with smaller, more agile competitors.
– Acquiring and maintaining customers through multiple channels causes data maintenance problems.
– Processing the large volume of subscription changes also creates a stumbling block.
– Offering customers the flexibility to change subscriptions after sign-up – such as adding more services or a new product – increases the complexity of billing.
– Subscriptions make automatic revenue recognition increasingly difficult and often require intensive manual work.
– Determining key metrics such as annual recurring revenue, retention or average revenue per customer is difficult and time-consuming.

If these operational challenges are not properly addressed, they become a bottleneck for a company’s growth.

A Two-Cloud Architecture Is Not Enough

But what is causing this bottleneck?

Ultimately, it can always be traced back to a company’s existing IT architecture.

Most companies use a two-cloud architecture at the core of their business model (order-to-revenue or order-to-cash process). One cloud is the Customer Relationship Management (CRM) system for managing interactions with prospects and customers. The second cloud is an Enterprise Resource Planning (ERP) system that enables companies to manage a variety of their day-to-day business processes, such as accounting and supply chain management.

However, when it comes to managing the dynamics of a recurring subscription model and all
associated business processes, the combination of CRM and ERP is no longer sufficient.

There are basically three reasons for this.
– CRM and ERP systems were developed for the sale of products. Everything is based on the concept of Stock Keeping Units. But companies in the Subscription Economy monetize products “as-a-service” with many different marketing strategies, including different editions, usage-based prices, tiered prices, surpluses and recurring invoices.

– Hard coding and customizations are time and labor intensive. When companies try to retrofit these strategies into an SKU-based two-cloud architecture, they inevitably need hard-coded adaptations of their software and tons of customizations. In short, there is an extreme amount of back-end work.

– CRM and ERP can’t support recurring revenue growth strategies. If the market strategy develops further, additional software adaptations and customer-specific adaptations are necessary. Popular strategies for securing growth after the first market launch include, for example, international expansion, the launch of a second product line, or concentration on upsells. The problem is that the IT team has to make the appropriate adjustments for each new strategy.

Over and over again. For every new market strategy. CRM and ERP solutions are neither designed to support the complexity of subscription processes nor even to transfer information between the two systems.

Workarounds Cannot Solve the Two-Cloud Problem

In the collaboration between Zuora and more than 1000 companies offering subscriptions, a pattern has emerged: With a two-cloud architecture, companies inevitably have to make programmed adaptations. IT teams have developed some creative workarounds, but all of them have their individual weaknesses.

– Manual workarounds. Some companies prefer manual workarounds to adapting their systems. They shift the burden of manual adjustments to their finance department. Each new customer order must be processed manually, each invoice change must be processed manually, each contract change must be processed manually. Although this is feasible for small companies with around 30 customers, as soon as the company grows, it no longer works.

– Rely on a CPQ. Other companies, on the other hand, act according to the motto: “A CPQ system is better than nothing”. However, it is a common misconception that a CPQ can fix everything. Because it doesn’t. A CPQ system is a channel to support the sales team in preparing quotations. Once the quote has been created, the process is passed on to the finance team and the same chaos follows. If the company uses multiple sales channels, the chaos becomes even greater.

– Homegrown billing. Many companies develop their own billing system or adapt a cheap, API-friendly solution for recurring revenues in order to be able to issue invoices at all. However, this only works as long with uniformly priced subscriptions; as soon as a company’s market strategy develops further, these simple billing systems fail due to the increase in dependencies within order processing.

The Third Cloud: An End-to-End Subscription Management Solution

There is a better way. Due to the dynamics of subscriptions, companies in the subscription economy must pursue a three-cloud architecture strategy. A CRM/eCommerce solution for the acquisition channel, ERP for the general ledger and, in the middle, an end-to-end subscription management solution that is responsible for all order-to-revenue transactions and enables companies to evaluate, bill, collect, measure, acquire, and maintain their subscribers.

When subscriptions are added or changed, all transactions are recorded in one system. As the market strategy evolves, all effects on incoming orders are aggregated in this system.

This third cloud strategy has enabled Zoom, NCR, Symantec, eMoney, Carbonite, Servcorp and many other companies to easily monetize subscriptions, rapidly expand products-as-a-service, and pursue growth strategies. The third cloud is a significant paradigm shift, but an essential one to support this growing shift to recurring revenue models.