How the Subscription Business Paradox Destroys Value in Business Acquisitions
By: Jeff Wissink, Navint Managing Director
On paper, the business acquisition looked great. A company with a growing customer base, low subscriber churn, and a complimentary product or service. Putting money behind it made sense as modeled synergies suggested strong accretive value. But here you are entering year three. The combined company is struggling to maintain organic growth goals, underperforming both net new and cross-sell revenue expectations, and struggling mightily to realize anticipated cost savings.
Why might this be happening?
Welcome to the Subscription Business Paradox
We introduced the notion of the Subscription Business Paradox last year. Quite simply, the term means that in order for Continuous Customer™ businesses to grow and thrive, a diversification of product offerings is required. A company needs new products and to be able to bundle and price those products in ways that are attractive to the customer. It’s a never-ending journey. The trouble is that this necessary diversification of offerings can, if not managed properly, drive incredible complexity and cost into an organization.
Let’s use a simple example to demonstrate this concept in the business acquisition context.
The acquired company was fine-tuned to sell a singular product, with a simple pricing scheme. By virtue of this relatively simple business model, it followed quite rightly that their sales, sales operations, customer success, delivery, support, and financial operations were also fairly simple. Their entire business operations were orchestrated such that every step in the customer journey was frictionless. It was an organic growth machine.
To kick-start the companies’ growth, the Board decides to pursue an acquisition strategy. Now, as part of a combined entity, they are a multi-product company. Given the complimentary nature of the products and a new incentive plan to do so, the sales team develops new and ever-changing number of ways to bundle and price these new offerings, but orders must be recorded in multiple systems. Delivery isn’t an integrated experience from either a customer nor an internal operations optic. Some services are invoiced while others require a credit card, with no centralized view to what the customer owns or owes. Customer self-service becomes impossible. Invoices are wrong. Inbound support calls increase. Customers have to interface with multiple teams for the same problem. And frustrated customers start to leave.
It’s an insidious problem, and the operational nature of it tends to make the eyes of most Private Equity people I know thoroughly glaze over. But know this: if you’re not managing it, the subscription business paradox is destroying value in the combined entity. The dynamic monetization, agile packaging, and flexible pricing necessary to drive revenue growth are the very things driving incredible complexity and cost into the acquired company and your portfolio.
Preventing (or Stopping) Operational Value Destruction
One of our clients had the very scenario I described above. They are a high growth, acquisitive SaaS software company and within a year purchased several complimentary products to supplement their flagship product and round out a customer offering. We helped them develop a “reference business architecture” – a formula that combines new and streamlined processes with an appropriate and high-performing organization and technology stack to rapidly fold subscription-based acquisitions into the company. Now, within 90 to 120 days of purchase, the acquired companies do business in an optimized “<insert client name> way.” Our client is now able to capture the anticipated value of the acquisition quickly and efficiently.
You might be thinking that lots of companies have done this masterfully over the years, as have many private equity firms. And that’s true.
But as we’ve said, recurring revenue-based businesses are inherently different than traditional businesses. They require a tight interconnection amongst all internal functions to operate efficiently and achieve that frictionless experience. The ability to package, price, bundle, discount, manage subscriber preference, bill, collect payments, etc. in this frictionless way creates enormous complexity that must be holistically designed and built. Bringing multiple subscription businesses together without that approach drives operational complexity exponentially higher.
Thus, your post-merger integration playbook needs an update for systematically folding recurring revenue business acquisitions into the portfolio. A little upfront time building the reference architecture for subscription businesses will pay huge dividends down the road.
We are pulling together an executive brief that will cover some of the best practices we’ve developed to speed integration in a portfolio of recurring revenue business acquisitions. If you’d like to receive a copy of the report when it’s available or learn more about how we develop reference architectures for recurring revenue business acquisitions, shoot me an email at firstname.lastname@example.org.