Understanding the 5 Stages of Recurring Revenue Growth

While all organizations want their recurring revenue stream to increase, relatively few have developed a lead-to-revenue architecture that will enable steady, long-term growth. Perhaps more concerning, many companies are approaching or have reached an inflection point in their recurring revenue strategy—one in which business performance begins to deteriorate due to a lack of organizational maturity, increasing complexity and rising costs.

Our Recurring Revenue Maturity Framework helps assess where clients are in their recurring revenue journey and develop a strategic plan to increase maturity and enable continued growth. Here we look at the five stages of recurring revenue growth:

Recurring Revenue Maturity Curve

Stage 1: Exploration

Companies that are early in their recurring revenue lifecycle often approach the launch of this business model the same way they would any new product introduction, geographic expansion, or other strategic growth initiative. Because 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, the business experiences obvious, albeit modest, growth. Over time, growth tends to increase as the business defines the offer, experiments with discrete market segments, tests pricing/packaging and solidifies the business case.

Stage 2: Hard Launch

In the second stage of our Recurring Revenue Maturity Framework, the offer is launched in earnest. Sales and marketing efforts are properly aligned to drive interest and adoption. Growth occurs, sometimes rapidly, which drives support for the new model across business stakeholders.

Stage 3: Expanding | The Inflection Point

Unfortunately, as the recurring revenue offering grows, so does the complexity associated with it. Businesses must support complex billing calculations during the quoting process, as well as enable contract alterations, such as upgrades, add-ons and swaps. Existing processes and tools across Sales and Finance cannot support these new needs and the model becomes both inefficient and costly—negatively impacting revenue opportunity. What had previously worked to drive business forward now is a hindrance.

As with any inflection point, the business can go one of two ways: performance can decline as the business continues to use a legacy system to attempt to address issues like revenue leakage, billing inaccuracies and mushrooming headcount in isolation; or, the organization can develop and deploy a comprehensive and complete lead-to-revenue architecture that is designed to optimize the entire recurring revenue lifecycle.

As noted in the diagram above, our Continuous Customer approach to recurring revenue, represented in red, enables the business to grow through the creation of a six-step cycle: package, engage, serve, monetize, optimize and repeat. It is in using this approach that businesses can generate steady and healthy growth and avoid the pitfalls that often come with the recurring revenue model.

Stage 4: Optimizing

For businesses following the Continuous Customer approach, stage four is marked by increased business productivity and continued revenue growth. This comes in large part from efficiencies derived by uniting the front and back offices to provide a streamlined customer experience. Issues experienced in stage three, such as revenue leakage, billing inaccuracies and mushrooming headcount, are addressed through foundational changes to the way the organization is structured and works together.

At the same time, for those businesses that are not taking steps to adapt people, processes and technologies to better suit the needs of a recurring revenue business, optimization simply means a faster, steeper decline. Product catalog proliferation, massive Excel spreadsheets and customer churn are all symptomatic on a fundamentally broken system. As time goes on, the problem deeps and becomes more difficult to reverse.

Stage 5: Maturity

After the optimization period, the recurring revenue business will reach a state of maturity. Assuming that the business continues to invest in an operational architecture that supports the recurring revenue model, the organization is likely to experience modest, long-tail growth and a longer life. That said, an improperly architected and sub-optimized business not only erodes the recurring revenue line, but also begins to starve other areas of the business such as innovation and R&D—underscoring the need for constant evaluation and monitoring of the recurring revenue business.

 

Capturing the recurring revenue potential

Companies that are adopting a recurring revenue model should consider two separate and distinct issues: 1. How they can avoid the pitfalls that will lead to performance erosion and economic decline; and 2. How they can optimize the business to maximize the recurring revenue opportunity.

The answer to both questions comes down to embracing the Continuous Customer concept and designing the organization to enable its principles. Our team has helped companies create and deploy a lead-to-revenue architecture that will build organizational maturity, optimize operations and enable growth. To find out how we can help your organization reach Stage 5, contact us at info@navint.com.

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