Revenue Growth in a Digitized World—Recurring Revenue Models
A recurring revenue model increases stickiness, predictability and the network effect of certain products, but implementing it can be challenging.
Alexander Group in partnership with Chief Executive Group, publisher of Chief Executive magazine; Corporate Board Member magazine; and facilitator of Chief Executive Network, a leading CEO membership organization, recently surveyed nearly 400 CEOs and business leaders on their future growth strategy. How are they determining their readiness to adapt to the new marketplace that centers on buyer behaviors and evolving go-to-customer models?
Part 3 of this three-part series presents the findings and recommendations as they relate to the switch to recurring revenue models.
1. The new buyer journey
2. Investments in new roles
3. Recurring revenue models
Part 3: Recurring Revenue Models
Continuous revenue stream is gaining tremendous ground as a successful pricing model in this new era. As the name implies, a continuous revenue stream—or recurring revenue model—generates revenue throughout the customer’s entire lifetime. This aaS (as-a-Service) model, whereby a company sells a product as a service, provides significant advantages, including predictability of future revenue and the strengthening of the customer relationship. While several industries have long relied on recurring revenue models to ensure their growth and market share retention, digitization is now compelling many others to consider making the switch.
This evolution comes in response to not only how customers want to buy (consumption vs. big fixed cost), but also what investors want to see. Companies, public and private, are driving toward recurring revenue to drive valuation, as investors place a premium on recurring revenue streams. The model increases stickiness, predictability and the network effect of certain products.
In our survey of 384 CEOs, the importance of the recurring revenue model as a strategy today was ranked 6.8 out of 10, on our 1-10-scale. Considering the prominence of subscription-based revenue in certain industries, it comes as no surprise that advertising, marketing, PR, media and entertainment, as well as telecommunications and IT CEOs attribute greater value than the average CEO to the model, at 8.6/10 and 7.9/10, respectively. Nevertheless, our survey demonstrates how the model is rapidly gaining momentum in manufacturing, with CEOs across consumer and industrial manufacturing expecting it to become a more prevalent part of their strategy at a value of 6.0/10 to 7.3/10 within only two years.
We’ve also observed that while many companies recognize the need for this recurring revenue model, most still struggle to implement it. Establishing the right pricing strategy to maintain or grow margins in this complex operating expense vs. capital expenditure model remains one of the main challenges, as well as the fact that this model challenges the skills and capabilities of current teams. These challenges may explain organizations’ level of readiness in adopting the model, which CEOs in our survey ranked at 6.4 out of 10 today but expected to reach 7.2/10 by 2021.
To enhance their readiness and improve their chances of success, companies contemplating a transition to a recurring service as a strategy model must address five key areas, including:
1. Testing your strategy
Successful organizations take the time to understand their clients’ needs and business model and how those evolve through time. Sit down with your top clients to fully grasp the value you contribute—or could contribute—to their success and visit with your first-line sales managers to gain a better understanding of how they interpret your strategy. The link between your customers’ and managers’ points of view will help you determine whether or not your sales team has continuity in the message and can deliver differentiated value.
2. Appraising current value propositions
Scorecard your top value propositions with your marketing and product leaders to identify gaps in both product and delivery. Consider the following:
- Do our value propositions offer differentiation to the competition?
- Is there a compelling message to persuade a buyer to act?
- Are our value propositions quantifiable, and can we show a measurable difference?
- Are our value propositions simple enough for sellers and marketers to deliver in one breath?
3. Inspecting both pipelines
All organizations have two interconnected pipelines: an opportunity pipeline and a product development pipeline. Executives need to review their opportunity pipeline regularly to ensure rigor in its measurability and believability. After all, this is the source of quarterly growth. As well, a robust product development pipeline ensures sufficient new ideas on the horizon that connect value to actual buyers. Connecting both pipelines drives a message that everyone should focus on organic growth, while winning today.
4. Evaluating your front-line talent
Front-line sales managers have one of the most important jobs in the organization. Successful companies recognize that these leaders are the connection between the company’s strategies and execution in the field.
It is impossible to successfully set a new growth-oriented vision with mediocre sales managers. Conducting a fair and thorough assessment of your front-line sales managers is critical to success, but so is having the discipline to remove those who either cannot continuously improve or do not have the capability to put the new strategy into action.
5. Fixing the parts that are broken
Sales incentive compensation is one of the most powerful alignment tools in the compensation kit, but it also carries significant risk if not used properly. If your sales compensation plan contains broken elements (e.g., artificial pay caps or inappropriate metrics), you can use incentives to investigate the weak links. However, use caution. Sales incentive design is complex and easy to over-engineer, so make sure you’ve first developed a strategy that aligns future sales compensation to the behaviors you want to reward.
To access the full findings from the Alexander Group and Chief Executive Group CEO Survey, please download the whitepaper.
Learn more about the Alexander Group’s Manufacturing practice.
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