By: Jeff Wissink, Navint Managing Director

There is a correlation between business performance and the maturity of your recurring revenue business, but correlation doesn’t always turn out the way you would expect.

While we want our recurring revenue stream to grow “up and to the right” as our companies mature, Navint has found that, at a certain point in time, the business performance can start to unintentionally erode. We refer to this inflection point as the beginning of the subscription business paradox—the same initiatives meant to grow recurring revenue instead can drive complexity and cost into the organization.

The great news is that you can avoid this phenomenon. We’ve developed a Recurring Revenue Maturity Curve™ that we use to help clients navigate these potential pitfalls and enable recurring revenue growth. Let’s explore these stages and the inflection point.

Recurring Revenue Maturity Curve

 

Exploring and Beginning Stages

Companies that are early in their recurring revenue experience/lifecycle will explore, begin, and start to expand, evolving in the same way as any new product introduction, geographic expansion, or other strategic growth initiative. They have a relatively simple business model and can manage their smaller scale and lower level of complexity quite efficiently with their 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 takes place.
  1. Beginning: Offering is launched in earnest. Sales and marketing efforts are properly aligned (i.e., compensation, campaigns) to drive interest and adoption. Growth occurs, sometimes rapidly. 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 had 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 only the symptoms of a fundamentally flawed design. They are managing people, processes, and systems around the transactional sequence of marketing, sales, operations, and finance designed to sell a “widget” rather than a recurring revenue 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.

  1. 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) or, if they don’t, operational issues such as mushrooming sales operations and internal friction effecting customers appear. It’s these operational issues that can actually create a decline in business performance (“Without Continuous Customer™ Experience” curve). In companies with a lot of acquisition activity, the top-line revenue growth and many moving pieces and parts tend to mask this decline. Regardless of whether the decline is because of acquisition or organic growth, a little, insidious, downhill slide in organizational performance happens if the right people, processes, and technologies are not in place.
  1. Optimizing: Optimizing more of the wrong thing means a faster, steeper decline. Product catalog proliferation (a.k.a. SKU sprawl), massive Excel spreadsheets, and customer churn all symptomatic on a fundamentally broken system. The problem becomes deeper and deeper, and difficult to reverse. By optimizing under the Continuous Customer™ optic, business productivity and revenue continue to grow at a healthy pace.

Maturity Stage

At a certain point, the recurring revenue business will reach a state of maturity. Then this state will either slowly decline or have long-tail growth purely based on the operational architecture for, or against, the Continuous Customer.

  1. Maturity: A recurring revenue business properly that is attuned to the Continuous Customer will experience modest, long-tail growth and a longer life. An improperly architected and sub-optimized business, however, not only erodes the recurring revenue line, but also begins to starve other areas of the business such as innovation and R&D—the next big money makers.

Capturing the Recurring Revenue Potential

What can companies do not just to avoid the decline, but to maximize the recurring revenue opportunity?

It comes down to having experience with the new paradigm of the Continuous Customer and knowing 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, a company must recognize that recurring revenue businesses are inherently different from the traditional, item-based economy by which we’ve been optimized.

The ultimate trick? Be aware of what’s happening and catch the problem before it’s too late. We can help.

Download our free whitepaper on Navigating to Success via the Continuous Customer.

Helping Recurring Revenue Businesses Thrive and Grow