John Phillips, General Manager EMEA at Zuora
If the events of the past few years have taught us anything, it’s that businesses need to be prepared for all scenarios. Finance leaders, in particular, must build resilience into their long-term strategies. It is only then that they can defend revenue, jobs and reputation during times of hardship.
As the global economic landscape becomes more volatile, with inflation rising and a recession looming, recurring revenue models continue to be resilient. In fact, the latest Subscription Economy Index showed that, in H1 last year, revenue growth for companies using this type of model was 9% greater than for S&P 500 companies. Churn rates continue to be lower than pre-pandemic levels, with more and more customers refraining from cancelling their subscriptions.
One reason for this – and one of the most beneficial aspects of utilising subscription models – could be the ongoing access to customer feedback and data. Finance leaders can use this to help forecast future trends, predict shifts in revenue and inform long-term strategy development. It enables them to replace speculation with valuable insights. By employing recurring revenue models, businesses and their CFOs are arming themselves with the best tools to continue providing value for their customers, even when purse strings are being tightened.
Knowing your audience
Even in economically challenging times, customers often continue to pay for subscription services which they deem to be valuable. Those that fall outside this bracket are at risk of being cut. This is why the customer data produced through recurring revenue models is so important. Businesses can use it to provide tailored offerings to their customers, making sure that they put the right offers, in front of the right people, at the right time.
By continuing to provide value, businesses are able to build strong customer loyalty, which is crucial when it comes to minimising the risk of churn and lost revenue. An interesting case study in customer retention is the so-called “streaming wars”. Strong competition between the streaming giants has resulted in these companies exploring creative ways to keep churn low and customer satisfaction high.
With Disney+ bundling with Hulu and ESPN+ and Netflix announcing their lower priced ad-supported tiers, each platform is adapting their offerings in an attempt to retain customers. These moves have been successful and streaming platforms have some of the lowest churn rates across subscription models. By being flexible with their new offerings and listening to feedback, they have proved their value to customers.
Another great example is the vacuum maker, iRobot. After launching their subscription offering around maintenance, the team received customer feedback highlighting that there was interest in subscribing the vacuum itself. iRobot took this feedback on board, and created a monthly plan that includes a robot vacuum, automatic delivery of accessories, a protection plan, a dedicated support team, and a new vacuum every three years. This new offering has enabled iRobot to expand into new markets with a versatile revenue stream.
Recurring revenue models allow business to continue to add value by strengthening customer loyalty. This is crucial when it comes to minimising both churn rates and lost revenue. For CFOs operating in today’s climate, it is crucial. However, it is also just one benefit of many when it comes to subscription models.
Predictability is key
What sets recurring revenue models apart from traditional sales models, is that they are not tied to single transactions. This new model helps provide businesses with a predictable cash flow, with customers billed on a monthly, quarterly or yearly basis – every CFO’s dream.
The future long-term growth of the subscription economy relies on this predictability. Keeping hold of existing customers is much easier than hunting for new ones. By reviewing customer data, businesses can monitor which behaviours can lead to lifetime members, which customers are best to upsell, and which customers are most at risk of churn.
Playing the long game
Recurring revenue models come into their own when CFOs are able to balance creating long-term business strategies, while preparing for possible market turbulence. Loyal customers provide businesses with a regular cushion of financial support, whilst existing customer data provides the best opportunities to upsell. Moreover, CFOs have the ability to scale quickly, while management teams can focus on long-term and lifetime customer value, even during times of economic and market uncertainty.
With the threat of a recession on the horizon and margins smaller than ever, businesses are under constant pressure to provide true value for their customers and the pressure on finance teams has never been greater. With recurring revenue models, CFOs can arm themselves with the tools needed to develop long-term business strategies that promote customer loyalty. By playing the long game, CFOs can protect the wider business’s long-term vision, even when the going gets tough.
