According to the Subscription Economy Index (SEI), subscription-based companies are growing revenues approximately 8 times faster than the S&P 500.1 By 2020 more than 80 percent of software businesses will have transitioned their revenue model from perpetual to subscription.2 The subscription economy is a compelling and unavoidable arena that software companies must play in.
As a result, the game of building a successful software company has changed. A domineering focus on growth through new customer sales and a siloed reactive approach to delivering value for those customers no longer works. That is the old game. Yet, it’s the only game that many software companies are playing.
The new game is focused on revenue retention and expansion. To win the new game, Chief Revenue and Customer Officers are harmonizing their customer acquisition, retention and expansion strategies through Adop- tion Methodologies. Adoption Methodologies enable the sale, delivery and sustainment of customer Value-based Outcomes on a repeatable, scalable and measurable basis.
Prior to 2016, ‘top line growth at any cost’ was the strategy used by subscription-based software leaders like Salesforce, NetSuite, Zendesk, ServiceNow, LinkedIn, and Zenefits. With this strategy, they had achieved groundbreaking growth and record private investor and public market valuations. However, in early 2016 the tide turned.
The absence of profitability in these subscription revenue software companies was not so- mething investors and markets would continue to stomach. Valuations were slashed relative to prior years. Balance between growth and profitability was now expected and still is.
This balance is achieved through the efficient acquisition of customer revenue that has a high probability of being retained and expanded. This is the new game.
Winning this new game is how your subscription revenue software business will achieve long-term success. Winners synthesize revenue acquisition, retention and expansion strategies through an obsessive focus on customer adoption. Customer adoption is achieved by intersecting prescriptive Value-based Outcomes across the customer’s lifetime.
As Revenue and Customer leaders, winning the new game means creating scalable, repeatable and predictable recurring revenue. To do this you must ensure your Sales and Customer Success strategies evolve to effectively play the new game. This white paper explains where and how to execute this evolution.
The Old Game
In the old game, customers are sold to and, consequently, serviced in a way that doesn’t focus on the customer’s ability to truly adopt the solution being sold. The process of discovering, designing, delivering and maintaining value realization for the customer is inconsistent, di- sconnected and ineffective.
The old game creates the following risks and lost opportunities for your subscription revenue model:
Average deal size for new customers is below expectations and multi-year contracts can’t be sold without offering significant discounts.
Revenue churn is high and it’s not clear why, how to predict or how to prevent.
Revenue from existing customers isn’t being expanded beyond their initial purchase, putting too much dependency on net new customer revenue.
Today, most traditional software companies are set up for the old game. Their leaders know the old game, maybe understand the goals of the new game, but are unsure how to adapt their organizations strategically to win in the new game.
Even in new and ‘modern’ software companies, the old game often dominates. These companies are founded by or are hiring leaders who have played the old game for their entire career. These leaders have, often unknowingly, integrated the old game into their new company’s architecture.
In the old game, software companies operate with high walls between their Sales and Support, Professional Services, and/or Customer Success organizations. These walls were built from legacy sales and post-sales cultures, processes, and roles. These walls were designed in the era of ‘acquire the customer at all costs’, ‘sell-implement-walk away’ and ‘feature-function bake offs’.
Professional Services, Support and Customer Success are blindly catching newly acquired customers chucked over the wall by Sales. These industry and product experts accountable for the success of the customer are on the back foot from the start. With precious little time, they scramble to understand the goals held by both customer sponsors and users. As a result, services and support are delivered to customers in a way that too often fails to retain and expand customers.
Customers are buying subscriptions to products/modules/roles that don’t align with their go- als. A redundant module, too many users or (even worse) the wrong product are all too easily sold by a Sales team in the old game. When it comes to revenue retention in these customers, this practice will make achieving at least 100% net revenue retention very difficult.
Data analysis is not in short-supply in the old game. The feature/functions most clicked in the product or support ticket trends are often standard reports. However, the ability to interpret this data in the context of the customer achieving value realization is often absent.
Without a clear understanding of what the customer is seeking to achieve and what activities the customer’s team need to complete to achieve it, the customer data loses value. At best, this data creates lagging indicators that are difficult to take direct and efficient action against.
Avoid Simply Rebranding the Old Game
In the past 3-5 years, most software companies have inserted ‘Customer Success’ into their core values, org charts and role descriptions. However, many of these companies are still stuck in the old game. Their subscription revenue unit economics reveal this.
In companies playing the old game, Customer Success is used an aspiration or cultural value applied to a Sales team incentivized to only acquire new logos. Customer Success is used as a go-to-market friendly buzzword to replace the name of reactive Support and transactional Professional Services teams.
Customer Success is treated as a stand-alone team of fire fighters whose potential strategic value is not understood or realized. The absence of strategic investment parallel to what Sales and Marketing receives proves this. Customer Success is not set up to drive the growth and profitability of their subscription revenue model.
The Rule of 40% is one benchmark commonly used to measure the balance between growth and profitability of a software business with a subscription revenue model. The Private SaaS Company Survey5 uses this benchmark to serve as an index for its survey respondents with over $15MM Annual Recurring Revenue (ARR). In 2017, the median Growth + Profit index for this group of respondents was 17%; less than half the 40% benchmark.
The survey report provides a breakdown of the unit economics of those respondents above the 40% threshold and those below:
As Revenue and Customer leaders striving to achieve a growing and profitable software subscription revenue business, your strategic focus and investment must point towards revenue retention and expansion. Your customer acquisition strategy should support this focus. Welcome to the new game…
I help leaders in B2B SaaS companies and their partners build scalable, repeatable and predictable recurring revenue and lasting profitable customer relationships. The companies I work with increase Net Revenue Retention by double-digit percentages.
How? I align and integrate their Sales and Customer Success strategies, teams and systems through a focus on selling and delivering Prescriptive Value-based Outcomes to their Ideal Customers.
With over 15 years of leadership roles in B2B software go-to-market strategy, sales engineering and customer success, I’ve successfully smashed through the walls that separate sales strategy from post-sales strategy in so many software companies.
If you are a B2B SaaS business or partner seeking profitable growth through positive net revenue retention and improved CAC:LTV ratios, reach out and I’ll share my proven strategies and methodologies.