7 Reasons to Add an “as-a-Service” Subscription Model to Your Business

Will You be Left Behind by the Growth of the Subscription Economy?

7 Ways to Benefit From the Advantages of
Predictable Monthly Recurring Revenue

 

TRANSCRIPT:

Buyer Behaviour – this is what’s creating the demand for subscription based IT solutions. The catalyst might be Cloud technology, but it’s the change in how people and businesses want to consume their IT that’s creating one the largest opportunities (and threats) for the tech sector.

If you don’t offer a Managed / “as-a-Service” solution, there’s a good chance you’ll get left behind in a fast changing world. That aside, there are many other benefits that can also be derived from having a subscription orientated revenue stream in your business. Below I list…

1. Increased Value of Your Business

In a moment, I’ll show you how much more valuable your business is when you offer subscription based service. The intrinsic value of your company should be as high as possible, especially if you ever intend to sell it. But even if this kind of exit strategy isn’t part of your plans, things like credit ratings or your ability to raise capital from either financial institutions or independent business investors, are all impacted by the value of your company.

Investors buy future revenue, not previous success. Having a subscription or a recurring revenue based financial model will significantly increase that value.

For my Service Selling Mastery program, I’ve carried out a lot of research and investigation into how to set up Managed Services and the marketing and selling of them.

As part of that research I came across a company called “The Sellability Score”. This is an organisation that’s helped over 20,000 companies improve the sale value of their business. The number one thing they found that increased the sales potential and value of a business is “Subscriptions” or what they call “Automatic Customers”.

These are customers that automatically repeat purchase. Having a service and some kind of subscription model significantly increases the ‘sellability’ and the financial strength within your organisation.

Let me give you an example of some of their research…

From working with 20,000 plus businesses, they found that the average sale value of a business is 4.6 times the pre-tax profit.

So as an example, if we had a company that had a £5,000,000 turnover and let’s say a pre-tax profit of 10%, then the sale value of that business would be £2,300,000, which is a nice chunk of change. But if you compare that to a business that has a subscription based revenue, then the average sale value is calculated differently.

For a business of a similar turnover (£5 Million) the value of that business is calculated at 4-6 times the Annual Recurring Revenue (ARR), or 48-72 times the Monthly Recurring Revenue (MRR). So if that was a £5 million annual revenue, that would create a sale value of between £20 – 30 million; over 10 times more.

It’s worth noting that the sale value actually increases depending on the turnover of the company. For example, a £10 million plus turnover business uses a ratio of 6-8 times the annual recurring revenue, or 72 – 96 times the MRR.

2. Greater Predictability

My second reason you should be implementing a subscription model in your company is the predictability that it provides. When you’ve got predictable and recurring sales volume, this will smooth out revenue and cash flow. Poor cash flow is the number one reason that the majority of businesses fold and go out of business.

Having a smooth, forecastable cash flow is very important for a number of reasons. Firstly, as I said, investors love it, but even if you’re not looking to sell your business, but you are looking to raise capital or investment, that predictable revenue gives the business incredible strength.

Secondly, it also impacts what you do with your revenue and what investments you make; these can be improved as well. For example, if you’ve got predictable revenue coming in then you can create a predictable investment in things like marketing. And the more you can spend on marketing, the more customers you’re going to gain.

But what’s more important, is the consistency in your marketing. This is really important. In my SMART Marketing programme, the R stands for “Repetition”. Repetition and consistency in your advertising is one the foundation principles of effective marketing. You gain more value per pound or dollar invested, when there is repetition in the marketplace and consistency of message.

The effect of your advertising compounds over a longer period of time and therefore, the advertising results also improves over that period. So a consistent marketing effort, made because you’ve got predictable revenue coming in, can obviously be achieved and that creates what I call the “Circle Life”.

If you’re increasing the amount of marketing investment you make and you’re doing it on a consistent basis, then you’re bringing in more customers, which obviously creates a predictable revenue stream and a positive cash flow, which then gives you more to invest back into marketing.

The whole thing organically grows and compounds and gains momentum. So predictability is very important.

3. Increase in Client Value

The third benefit is in the value of each client to your business. A recurring subscription actually increases the average client Life Time Value (LTV). If you compare single transactions, with a customer whose making multiple transactions, that are guaranteed through a subscription, then the value from that client is obviously significantly more.

Also, because you have recurring sales from a client, this also lowers your overall cost of sale. This now means you are also cutting costs, which means your margins are improving as well.

So it’s not just about improved revenue streams, but it’s also your profitability that improves. In addition to this, with more revenue per customer, you could need less customers to achieve your revenue goals. So you can look at it from two different perspectives.

In fact, I have a case study at www.achievesuccess.co.uk/CSM that shows you exactly how this compounding value of subscription increases the client value and how that can significantly increase the revenues per year for your business without actually doing any additional volume in sales each month.

This whole idea about lifetime value of your clients is, again, one of the foundation principles of all marketing and lead generation activity. You can’t really decide how much to invest in marketing until you know the lifetime value of a client.

For example, if you know a client is £20,000 to you, then you can make a decision on how much you want to invest to acquire that customer, because all marketing is at the end of the day is a way of buying customers. Obviously if you’re increasing the value of each client through subscriptions, then you’ve got more money to invest in marketing.

Again it’s “The Circle of Life”, because you’ve now got more money going into marketing which means you can gain more customers and if the value of each customer is greater, this means you’ve got even more money to potentially invest in your marketing, which means you gain even more customers. Thus round and round it goes, compounding all the time. So the increase in your client lifetime value is extremely important.

4. Sell Once, Get Paid for Ever

The fourth benefit I’d like to discuss is the fact that you can sell once and potentially get paid forever. It really is a residual income.

This is often most people’s goal, not only in business, but in our personal lives as well. We look for ways in which we can create a residual income, because that’s what will allow us to retire or remove the stress of knowing where our our next pay cheque is coming from. It’s the reason people invest in pensions or buy property or invest in other financial products that potentially would give them a residual income. That’s what we’re talking about here, as people sign up to subscription you’re getting paid numerous times for making the sale once.

As I’ve said, investors love residual income. This model gives you the opportunity to sell once and “Land” a client and then “Expand” by cross-selling and up-selling with other products; therefore further increasing the lifetime value of each client.

Actually what happens, is that the more products or services or bolt-ons or whatever it might be that a client actually subscribes to, they also become a much stickier customer and a more loyal customer to your business. This means your attrition rates from subscriptions also reduces.

Now we see an upward spiral or increasing and compounding value with each sale as customers continue to pay you on a residual basis. I don’t have the time now to explain how, but you can automate a lot of these up and cross-sell activities, further reducing the cost of sale.

By further reducing the cost of sale, you’re further increasing the profit per transaction. This is another example of how not only do revenues grow and become more predictable and forecastable, but also, this reduction in costs further increases profits and margins.

5. Better Human Resource Management

Better and more predictable management of your human resources is my fifth reason why you should be looking at adding a subscription model to your business.

Having the right volume of staff and personnel at any given time is always a challenge. This is especially the case if you are a project centric company who goes through peaks and troughs in sales. Sometimes you’re extremely busy, you’re making lots of money and obviously you need lots of human resources to deliver on all that project work that you’ve sold.

If you don’t have those resources in place, quite often you’ll have to find someone and find them quickly. This can actually be costly, because to find these emergency resources, you might have to use an expensive contractor. You might have to pay a premium to a recruitment agency to get you somebody fast or you may have to pay a premium in salary to attract somebody to join you quickly. All of which means your staffing bill increases and therefore your costs increase.

The problem then is with the troughs. You end up with excessive human resources and now you’re paying for people that you don’t have enough work for, or at least until you find the next big project.

One other challenge here, is that often when businesses get busy, they stop marketing, as they don’t have the resources to fulfil any additional workload or they’re just too busy to do it. Then, when all the work dries up, they have no lead gen. going on and then there’s usually a slump in revenues.

If you’ve now got too much human resource in place, without the work, that’s going to have a negative impact on your profitability.

The opposite of this true when you have a more predictable business. When you know the exact number of employees you need per number of customer and you have consistent customers each month paying on a recurring basis, you can forecast and recruit accordingly. So if you need a new sales executive, a new customer service representative or a new engineer for every 10 new customers that you bring on, then you can start to recruit accordingly based on the growth of your business.

Another issue here is that if you’ve brought somebody on and you’ve had to on-board them and train them and all that sort of stuff, that would be a waste of investment if you then had to let them go because you have a trough in workload. Instead, having more predictable manpower and human resource needs mitigates this wasted investment.

6. Stronger Buying Power

The sixth reason why subscription models are so important is the increase in buying power this gives you and your business. If you have predictable demand for your services, then you’ll have a predictable demand for the raw materials that you use. Therefore, if you go to a supplier and instead of just buying enough for the next project, you can actually say you want to buy enough for the next 12 months, you can negotiate a much better rate and potentially much better terms.

You may not pay for it all in one go, it’s more likely that you would negotiate a deal based on 12 months, but actually then call down on that contract, perhaps on a monthly basis to meet the business’ needs. The point is, you’re buying or committing to 12 months’ worth of raw materials or resources or whatever this might be for your business and getting more favourable rates, based on predictable sales, thus further reducing your costs and increasing your margins.

This also means you can now use your additional profits and buying power to invest in further developing your products by adding new features, or you can launch new products and revenue streams. This could give you a unique selling position (USP) and a competitive advantage for the products or services you sell; so it all ties together.

7. Less Stress

The last thing I want to talk about and the seventh reason why you must have a subscription model as part of your business is because of the reduction in stress it creates, particularly as a sales person or business owner.

When you know what next month’s revenue is going to be, or the next quarter’s, or even the next year’s revenue is going to be and it’s already committed to you by your subscribers, you can imagine the reduction in stress that that actually creates.

I recently read an article about an American bug spraying company who offer their services on a subscription basis. They have a 80% year on year stick rate of all their customers.

Imagine today you knew that 80% of your revenue for next year was already committed to by this year’s clients.

Just think about how impactful that would be on your business and how much less stressful life would be; even as a salesperson. I work with a lot of sales individuals who see the selling of subscriptions as actually quite negative. When they compare a £200 per month subscription to a £20K one off deal, all they see is the commission on that larger deal. But they’re missing the big picture for instant gratification of a short term hit in revenue.

If you’re a sales person who’s selling subscriptions and you stay with that business for a period of time, then every month your subscription revenues are compounding. Over a period of time, you’ll find you’ll start earning significantly more than you did by focusing on one-off transactions.

This recurring revenue model always reminds me of the story about the two gentlemen who are playing golf and have a bet on the first hole for a penny and then decide that every hole they would double the bet value. On hole two, they were betting two pence per hole, on hole three they were betting four pence and by hole four it was up to eight pence and then 16 pence and 32 pence and so on and so forth; which doesn’t sound that big a deal.

However, when you get to the 18th hole, if you have doubled the value of the bet at each hole, then the value of that wager on the 18th hole is nearly 5.4 Million. That’s a bit like selling services.

If you stay focused on the longer term, then as an example, in 18 months time, you might be getting a sales commission on 5.4 Million (using that analogy – not a guarantee of income projections).

Hopefully you can see how this compounding in revenues becomes very very powerful.

As I said, this takes away a lot of the stress if you’re not wondering where next month’s, next quarter’s or next year’s revenue is actually going to come from.

For those of us that run businesses, one of the reasons we got in business for ourselves, compared to having a job, is to have the lifestyle and flexibility that being your own boss brings. However, quite often people end up working “In their business” as opposed to “On their business” and it becomes nothing more than a job.

This is the difference between creating a business which is an entity in its own right and a revenue generating machine, as opposed to you just being self-employed working in a company.

So I’m going to wrap it up there. These are 7 exciting benefits of a subscription based business. A business like this is worth significantly more when it has predictability in future revenue.

It creates forecastable cash flow and the ability to invest back into the business in numerous ways.
A subscription increases the average lifetime value of each client that you get.
It allows you to sell once but get paid over and over again.
It allows you to run your business more effectively by improving how you manage your human resources.
It gives you increased buying power which allows you to improve margins and profitability and creates a significantly less stressful lifestyle.
So that’s just seven reasons why a subscription business model is so important and why no matter what business you’re in, you should be looking at adding a subscription element to your company.

The subscription economy as it is referred to is not just about what we sell but it’s also about how people buy. There’s an increasing demand from people who would rather subscribe to a service than actually buy products…

…Can You Meet Their Needs?

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