The benefits of developing Continuous Customers™ to fuel recurring revenue growth are widely understood. The combination of the predictable nature of recurring revenue and customer lifetime value make these businesses very attractive to investors, as evidenced by valuation multiples that far surpass any other business model today.
But as recurring revenue businesses scale and diversify product offerings, operational issues are exposed that often have significant business consequences. Organizations are finding that traditional methods, tools, and approaches for scaling their businesses simply don’t work anymore.
We’ve uncovered twelve major warning signs that indicate stalled recurring revenue growth—creating a business that cannot scale and will eventually erode profitability. Because of the far-reaching and cross-departmental complexity of these issues, it’s not always clear what the root causes are, where they reside, and who should be tasked to address the problem. Our clients often articulate one or more of these warning signs, and on further discovery, realize that all twelve apply.
1. Customer Churn
There are many reasons that customers take their business elsewhere. Often, it is not one big faux pas but consistent failure to meet expectations through every business touchpoint. If the fundamentals are not right, organizations struggle to keep sight of the customer because they are engaged in daily combat with their own internal complexities. Instead, they focus more effort and expenses on continuously winning new customers at the expense of customer retention. This is the biggest revenue-impacting warning sign.
2. Billing Inquiries and Disputes
Obvious, but often ignored, are billing inquiries and disputes. Billing disputes are the fastest way to either lose a customer or prevent them from buying additional products or services. They are rarely reported on the typical customer satisfaction metrics since this is handled in a siloed billing department. If an organization is receiving large volumes of billing calls or the team is spending an excessive amount of time in the infamous A/R email-box, this is a clear signal of fundamental problems in the end-to-end operation.
3. Definition Confusion
Sales thinks an “order” is one thing; finance thinks it another; and the customer is not sure what they purchased. Overt and subtle discrepancies consistently and unnecessarily create conflict between internal teams and with customers. Oftentimes customer-facing descriptors are not developed in favor of adopting terminology developed by disparate CRM and ERP software providers who are focused on their customer, not your customer.
4. Internal Conflict
When internal teams battle it’s sometimes because they have lost sight of the customer. For example, if billing creates new rules for sales, is it because it makes sense for the customer or because it’s easier for billing? Or does sales view billing, service provision, and payments as something far downstream that’s none of their concern? When the fences are built between departments, the customer suffers.
5. Inflexible Operations
Inflexibility can exist in technology, processes, and even people. Hearing “no,” “we can’t do that,” “our systems can’t support that,” “it will take a lot of customization,” or any variation thereof when it comes to socializing new go-to-market strategies is a signal that internal systems or ingrained processes may limit revenue growth.
6. Manual Process Overload
Often manual processes are created to make up for inadequacies in the CRM and ERP systems and all the processes in between. While not everything can be automated, an overabundance in manual processes is a sure indicator that the business cannot scale. This often leads the next warning sign of trying to solve flaws in process and technology with people.
7. Mushrooming Headcount
Sometimes it’s easier to hire people to operate an inefficient process than to analyze and fix deep-seeded issues. This is especially true when it requires close cross-departmental coordination or a reliance on already over-burdened internal groups.
8. SKU Proliferation
The SKU was once a way to connect all your systems together. Businesses sold the SKU, delivered the SKU, and charged for the SKU. Even in digital businesses this has become a way to control license entitlements and provisioning. SKU proliferation takes place because of fundamental limitations in how the product catalog is modeled and managed. This results in a lack of flexibility to package, bundle, price, and discount as well as confusion in sales, delivery, finance, and with customers.
9. Unattainable Customer Self-Service
Investing in a self-service portal on well-functioning systems should be simple enough to plan and execute. If internal staff members cannot understand their systems or data and if internal operations are hindered by excessive manual processes, then attempts at customer self-service will be fruitless. When the team cannot figure out how to do it or where to start, that is a clear sign that serious issues lie under the surface.
10. System Customization
Often disguised as ‘tailoring to your unique business,’ customization of systems and the integrations between them can be a huge disadvantage to operational scale, flexibility, and agility—but more importantly—to the Continuous Customer. Vastly complex, costly, ongoing, and rigid integrations are a sign that the design missed the mark.
11. Reporting Inaccuracies
The reporting mechanisms developed for the linear, item-based economy do not translate for recurring revenue models. Executives must correct for information gaps, errors, and conflicting data and ask for reports to be pulled again and again in an attempt to guide their new business model.
12. Revenue Leakage
Revenue leakage mostly comes from not billing (or under-billing) your customers for products and services provided. This can be devastating to profits as recent research has found the unintended loss of revenue to as much as one and five percent of EBITDA.
Being aware of these warning signs is only the first step, but an important one. It can serve as a launching point for organizational transformation. Businesses must proceed with caution, however. Without the proper guidance and support it’s extremely easy to slip back into siloed approaches and treating symptoms instead of the root causes.
Navigating these symptoms and growing recurring revenue is an undertaking that Navint knows well. In fact, Navint is one of few management consulting firms that has a fully-dedicated practice with deep domain experience and a proprietary, continually-evolving methodology to help organizations navigate the journey to success with recurring revenue, subscription business models, monetization strategies, and Continuous Customers.