In the Subscription Economy, the business model focus has shifted from one-time transactions for your goods and service to building a relationship over time with your customer. The customer’s willingness to pay is intrinsically tied with the value that you deliver to them over time. While it may be clear that the value is in monetizing this relationship over time, there are often operational challenges in transitioning to this new model.
Some of the key operational changes that need to be addressed:
Your operations function should be structured as an end to end process. You can no longer look at your Sales Operations and Billing Operations functions in silos. In fact these two groups should be very tightly integrated. Today many subscription-based businesses are organizing these as one unified function.
Subscription commerce is not a series of linear transactions. Since your business is focused on developing and maintaining your customer relationships, that involves subscription changes, add-ons and downsells, you need to be able to handle the order-to-cash process across the different stages of the subscription lifecycle.
Finally, without an investment in automation and a disciplined process it’s hard to scale operations to meet the needs of your growing business.
A single subscription in this business model can lead to 20x the number of front and back office activities. Ben Kwon, VP Operations, Zuora
In traditional businesses, sales and billing operations are separate, but linear functions
We’re all familiar with how traditional one-time product transactions run through the quote-to-cash process. It’s very linear.
Imagine Sally who works in sales ops. She helps sales reps generate quotes and pricing proposals. These quotes ultimately lead to order forms that are extended to the customers for signature to book the deal. Once she has a signed order she will ship their product or fulfill their service. Sally’s job is now done.
Now imagine Bill from billing ops. Once Sally in sales ops has completed a signed order and fulfilled the product, she throws the customer account over the wall to Bill. He’ll then generate and extend an invoice to the customer from the order form and will then receive payment against the invoice. Finally, Bill will record these transaction in the their accounting system.
Sally and Bill have been working together for the past 5 years, but they have never met in person.
Subscription businesses create lots of quote-to-cash complexity
Now let’s take a look at a similar transaction in a subscription business. Once again, Sally will work with her sales reps to create a quote and pricing proposal. This will lead to an order form for signature.
However, rather than ship a product Sally is creating a subscription and provisioning their service. Bill picks up the ball and extends an invoice to the customer for their first month of service. Once again he collects payment on the invoice and records the revenue in his accounting system.
But Bill is not done. At the start of the second month he has to generate another invoice, collect another payment for the same transaction for the second month of service.
Meanwhile Sally has been working on an upsell opportunity with her sales rep. Before she creates the quote she needs visibility into the subscription, invoice and payment status. Once the upsell quote is created this triggers another order form and a subsequent amendment to the existing subscription. Bill has to create yet another invoice, collect another payment and record the transaction within his accounting system.
What happens when Sally has a cross sell opportunity or a contract renewal?
A single subscription in this business model can lead to 20x the number of front and back office activities for Sally and Bill.
Many operations people know that automation is a key component to delivering scale but in the subscription model, it’s easier said than done. Ben Kwon, VP Operations, Zuora
You’ve just learned about the significant increase in transaction complexity in managing the lifecycle of a subscription vs. a one-time order.
Now you need to scale your operation to handle hundreds or thousands of customers.
The keys to scaling operations are:
Integrating your front and back office
How do Sally and Bill keep up with the volume of transactions without hiring an army of operations resources? It’s all about transforming your operations organization.
First you have to Integrate your front and back office. Get Sally, Bill and their teams to spend more time together, and drive more cross-functional alignment. Some of the companies we work with have actually moved these groups together under the same function.
Automating and enabling key processes
Many operations people know that automation is a key component to delivering scale but it’s easier said than done. Automating a process can be difficult, but leveraging the right tools can help get you over this hurdle. Many companies have realized exponential productivity gains through implementing a Relationship Business Management solution like Zuora. For example:
Enabling your organization both internally and externally can also be a key factor to scale:
Becoming an agent for change
Once you have a plan for integrating your front and back office and automating key processes, you have to drive a change in mindset to effectively execute the changes in your organization.
The next article explores driving change in more depth.
Operations is no longer a group that just processes transactions: orders, invoices, payments, etc. Ben Kwon, VP Operations, Zuora
Operations can help drive down your cost of customer acquisition. But don’t limit yourself to just looking at ways of reducing cost. Operations can also drive Annual Recurring Revenue growth through:
Operations can also drive strategic initiatives such as:
The end result
Let’s revisit Sally and what are some of the things on her mind today:
Sally helps her company navigate their business by providing real time KPI’s. In addition to the traditional funnel metrics that we have all measured exhaustively over time (web visits, leads, conversion ratios, time to close, win rates…which are all backward looking). Sally is now measuring forward looking metrics like Annual Contract Value, Total Contract Value, Monthly Recurring Revenue and Annual Recurring Revenue.
Sally also now plays a role enabling her sales organization to drive incremental install base revenue by identifying upsell, cross sell opportunities.
By empowering reps to become self sufficient, on Z-Quotes, she has helped reduce the cost of sales by increasing the Rep to Order Management ratio.
Finally, as Sally’s company grows she is constantly making enhancement to their compensation packages, aligning them to the overall strategic initiatives.
Bill in billing has also elevated his game. He continues to measure traditional billing operations or finance metrics, such as Days Sales Outstanding, time to bill, cost per invoice, bad debt, etc. But he’s also now working closely with the CFO to measure Growth Efficiency Index, recurring profit margin, retention rates by customers and volume.
Bill also plays a big role in cash flow management. He works with the FP&A group to forecast billings and collections that result from different billing schedules across their customers.
And in addition to forecasting the billing/collections he’s also analyzing revenue recognition. He’s forecasting revenue for the current and future quarters from new, upsell and usage based business. Because Bill’s company wants to go IPO in the near future his focus is on predictable revenue forecasting.
And finally, Bill has become one of the company’s secret strategic weapons for churn prevention. Given the volume of invoices and payments a typical subscription transaction requires, Bill is in constant contact with his customers. He plays a critical role in maintaining customer relationships.
There are many new dimensions to incentivize your sales org in a subscription business. Ben Kwon, VP Operations, Zuora
The shift to subscriptions will impact your compensation models since you’ll collect payments for recurring services over a period of time vs. up front as a one-time transaction.
Compensation was easy in the one-time sale, as you just paid a % of license fee with some type of bonus structure for over achievement.
Key strategies to think about:
Now how do you incentivize your sales team? You don’t want to de-motivate them by shrinking their commissions. There are many new dimensions to incentivize your sales org in a subscription business. Are you leveraging these dimensions to promote your business objectives?
Aligning business objectives to compensation planning: