By Tamsyn Attiwell, VP Global Services, Zuora
If you open any newspaper or news website these days, you will probably see an article about one of the “digital wunderkinds” of the twenty-tens. These are the founders of extremely successful start-ups like Airbnb, Uber and Snapchat, which have sprung up like mushrooms in the past few years and – deservedly – are attracting equally big numbers of users and investors. But what about small and medium-sized businesses (SMBs) that don’t sell apps or digital services? Do they even stand a chance to be successful in this era of digital disruption and fast change?
Of course they do, because no matter how different start-ups might seem from the outside, underneath the bonnet they can be remarkably similar. Their engine, fuelled by technology, ensures customers receive the right products and services, at the right time. The only question both established and new businesses need to ask themselves is – will this engine make it through the next decade, or does it have to be scrapped?
Enterprise resource planning (ERP) technology from the likes of SAP and Oracle or, depending on the size of the business, a simple Excel spreadsheet, serve you well when your business is built on one-time, order-to-cash transactions. They tell you what your profits are and how much product you are shipping: managing one order, one invoice and one payment for each sale at a time.
However, these somewhat antiquated tools didn’t anticipate that our economy would shift rapidly from this product-based, “buy-once” world to one centered around recurring customer relationships. Today, many customers favour convenient access to products and services by subscribing to them on an on-going basis, rather than buying them outright. For example, they subscribe to Soundtrack Your Brand’s catalogue to be able to legally stream music in their business, rather than buying physical CDs. This means that, in this subscription economy, your business success now depends on recurring revenue that you earn from existing customers.
When a business sells a subscription to a service or product, the whole business model changes – and this shift requires new data-centric ways of thinking, which comes with real challenges for many companies. You want to make it easy for customers to add more services whenever they want. You want to cross-sell and up-sell. You want to persuade your customers to buy more with trials and promotions. Headspace is a prime example of this, which offers everything from a free daily 10-minute meditation programme to hundreds of hours of content through multiple subscription packages.
Not surprisingly, each of these customer subscription changes adds up to drive complex financial calculations. They demand a system that aligns all product updates to a customer billing and simplifies the renewal process for your customers. This system also needs to handle the complex financial calculations needed to provide your customer with a single, intuitive bill.
ERP systems were not designed to understand the nature of recurring payments. They can’t handle pricing and packaging changes like freemiums, upgrades, downgrades or add-ons – or allow you to test them. They can’t tell you how many active customers you have, or what your churn rate is. Most importantly, they can’t give you a unified view of how your business is doing.
Swedish start-up Trustpilot, which helps companies to proactively collect reviews and gain insight into what consumers think about their businesses, faced a similar challenge. The finance team of six struggled to create 1,400 invoices per month, which were largely produced manually due to the limitations of Trustpilot’s internal IT set-up. To solve this issue, and lay the foundations for ongoing growth, the company implemented a Relationship Business Management (RMB) system. It works alongside your ERP to help you run your subscription business. RBM was developed specifically to meet the needs of the subscription economy and track the customer-centric data that success requires. It meets the new financial requirements unique to subscription businesses, like recurring revenue, unifying your commerce, billing and finance processes so customer relationships take centre stage.
The RMB system helped Trustpilot to automate processes and do business more easily with companies outside its home country of Denmark. But importantly, it systems also allows you to quickly modify your pricing and packaging options without draining IT resources on customising your ERP to roll out price change – a key component in managing all of this complexity around shifting to a subscription-centric business model.
Amazon Web Services, for example, has changed prices more than 42 times since launching its cloud service in 2006. Box, the successful online file sharing firm, has experimented with its pricing on a similar scale to keep existing customers happy and sell to new enterprise segments.
This approach of constantly tweaking your offer reflects the findings of a Bain study, which revealed that it is six to seven times more expensive to acquire a new customer than to retain an existing one. Why not adopt a similar approach and focus on on-going, rather than one-off, customer transactions? Just make sure to get your MOT before you set off, rather than having to call the AA mid-way because of an engine failure.