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May 11, 2015We’ve all heard that cash is king, or put another way, cash is the very lifeblood of a business. But today’s usage-based economy for products and services is changing the way companies collect and manage cash. What does a healthy order to cash (O2C) lifecycle look like in a subscription based economy?
When customers pay as they go, you’ve become partners
In the traditional business model, a company sold a product or service, and a customer paid for it all at one time. The exception was utilities, where most customers wanted to pay for only the amount (of long distance or electricity) they actually used.
In the new economy, customers prefer to pay as they go, based on a subscription or their amount of usage. Whether your company sells mobile phone plans or Software as a Service (SaaS), when the order is placed or the deal is signed, you’ve only really earned the first payment from the customer. You must continue earning trust and delivering a great customer experience in order to receive the true customer lifetime value of future payments. That means your company must become a partner to your customers; you’re in a long-term relationship.
Bookings are bull... the only metric that matters is CASH
In a recurring revenue business, bookings are only an indicator of future cash, and you certainly need to acquire new customers. But if there is a problem in your O2C process, your business model can quickly fall apart and bookings can deceive you about the true health of your company.
You and your customers are partners, so everyone should have skin in the game
If your product requires implementation time, it could be a while between when you close the deal and when the implementation is complete. If you book revenue when the product is fully implemented, your company could be waiting too long for incoming revenue. Instead, try to get customers to begin paying you when they sign, so everyone has skin in the game to make implementation go smoothly.
Get articulating revenue right, and you’ll conquer revenue recognition
First, develop a stringent booking policy. Carefully define what is included in a booking for your company. Does a booking contain both subscription product and services? Those have very different revenue recognition cycles and valuation rules. You should defer services revenue separate from subscription revenue. You’ll need a logical structure in your billing system that can automate revenue recognition for these different types of revenue.
Use automation to help reduce customer churn
Every organization will lose some customers. But if you gain two customers and lose one, your business might be going backwards, depending on your new customer acquisition costs. This is how a company could experience both rapid growth and serious cash flow trouble.
To manage customer churn, setting up the right customer experience is critical. That means having a solid plan for communicating with your customers at key intervals and having excellent customer service reps who know how to enhance relationships.
Automation can also improve the customer experience. And when you automate your order-to-cash process, you’ll also ensure more accurate data for your company—a win-win!
Mind your metrics for the long haul
Bessemer Venture Partners defined the 5 C’s—five financial metrics that all cloud-based businesses should monitor:
• Churn rate – what percentage of customers are being lost? This is the opposite of your customer renewal rate. • CLTV – what is the lifetime value of a customer? This will be higher if your solution is very sticky and your customer relationships are strong. • CAC – how long is the customer acquisition cost payback period? • Cash Flow – what are your company’s current Gross Burn Rate, Net Burn Rate, and Free Cash Flow? • Recurring Revenue – what is your amount of Committed Monthly Recurring Revenue (CMRR), Annual Recurring Revenue (ARR), and Annual Run Rate (ARRR)
The true CLTV will help you know how much you should be willing to pay to acquire new customers. It will also demonstrate how important it is to keep customers engaged and reduce churn rate. Be sure the metrics you monitor tie to when you expect to get paid. That’s the only way to know with certainty that you’ll have a viable subscription-based business.