In this update, Navint Managing Director Jeff Wissink introduces the Recurring Revenue Maturity Curve, and why a failure to recognize the operational uniqueness of recurring revenue businesses can cause significant problems as these companies mature.
To see past blog posts and blog series, click here.
Inflection Point: 5 Stages of the Recurring Revenue Maturity Curve™
As we've helped clients navigate to subscription revenue, we've started to see an interesting pattern emerge. We call it the Recurring Revenue Maturity Curve™. We use it to help businesses identify where they are on the Continuous Customer™ journey and how to mitigate the downward trajectory the subscription business paradox can create in business performance.
We've found that there is a discrete moment in time - an inflection point - when there is a chance to change the downward trajectory as seen in the figure below. This inflection point is crucial in preventing future pain, unnecessary costs, re-engineering exercises, and ultimately lost revenue. Let's explore these stages and this point.
Exploring and Beginning Stages
Companies early in their recurring revenue experience/lifecycle explores, begins, and starts to expand - like how new product introductions, geographic expansions, or other strategic growth initiatives evolve. They have a relatively simple business model and can manage their smaller scale and lower complexity quite efficiently with existing processes, people, and technology.
1. Exploring: Starts with an idea about launching a recurring revenue business or service line. Defining the offer, experimenting with discrete market segments, testing pricing/packaging, and solidifying the business case are taking place.
2. Beginning: Launch offering in earnest. Sales and marketing efforts are properly aligned (compensation, campaigns) to drive interest and adoption. Growth, sometimes rapidly, occurs. Everyone high-fives.
Expanding and Optimizing Stages
But as the company or recurring revenue offering grows and gets more complex, the traditional approach to recurring revenue business becomes not only painful, but also costly - negatively impacting revenue opportunity. What has previously worked to drive business forward now is a hindrance.
The change is so gradual that even the best companies are unaware they are treating symptoms of a fundamentally flawed design. They are managing people, process, and systems around the transactional sequence of marketing, sales, operations, and finance to sell a "widget" not a subscription service. As symptoms become more pronounced, big projects have lackluster results, innovations are difficult to bring to market, and customer demands are unmet as the business grows.
3. Expanding--the inflection point: This is where companies either have the right processes, systems, people, and experience in place and can continue to scale (see "With Continuous Customer™ Experience" curve in the above diagram). If they don't, operational issues such as mushrooming sales operations and internal friction effecting customers appear. This actually creates a decline in business performance as seen above in the "Without Continuous Customer™ Experience." Companies with a lot of acquisition activity tend to mask this decline because of top-line revenue growth and many moving pieces and parts. Regardless of cause (acquisition or organic growth), there's this little insidious downhill slide in terms of organizational performance if the right things are not in place.
4. Optimizing: Optimizing more of the wrong thing means a faster, steeper decline. Product catalog proliferation (a.k.a. SKU sprawl), massive Excel spreadsheets, customer churn: all of these things lead to more band-aids of a fundamentally broken system. This becomes a deeper and deeper problem that gets difficult to reverse. Whereas optimizing under the Continuous Customer™ optic, business productivity and revenue continuous to grow at a healthy pace.
At a certain point of time, the recurring revenue business will reach a steady state of maturity. This state can either slowly decline or have long-tail growth purely based on the operational architecture for, or against, the Continuous Customer.™
5. Maturity: This can be a point of no return. An improperly architected and sub-optimized business does not only erode the recurring revenue line of business, but also begin to starve other areas of the business. Innovation and R&D - the next big money makers - suffer because there is only so much money to go around. On the other hand, a recurring revenue business tuned for the Continuous Customer™ will experience modest, long-tail growth and a longer life.
Avoiding the Slow Slide into the Trench
What can companies do to not just avoid the decline, but maximize the recurring revenue opportunity? It comes down to experience with the new paradigm of the Continuous Customer™ and how to design an organization around it. This experience can come from internal leaders who have lived through the acute pain of not identifying the inflection point early enough. Or it can come from external professionals like Navint who've helped companies untangle the force fitting of subscription services (square pegs) into legacy organizational structures, linear processes, and MRP/ERP/CRM technology (round holes). Either way, there must be recognition that recurring revenue businesses are inherently different than the traditional, item-based economy by which we've been optimized.
The ultimate trick? Be aware and catch the problem before it's too late. We can help.
To learn more about Navint's Subscription & Monetization service offerings, please visit our Subscription Services section.
Past Blog Posts
Navint Director Pete Getchell lays out four key observations on monetization trends from this year's Monetization7 event. View the post here.
Navint Managing Director Jeff Wissink discusses the importance of proper operational setup of recurring revenue businesses, and how bad design can lead to unintended cost consequences. View the post here.
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