Recurring Revenue Model Opportunities for Various Industries
For years, businesses in a wide variety of different industries have realized the benefits of implementing a recurring revenue or subscription usage-based business model. With a recurring revenue model, the initial sale of a product or service is just the beginning of a potential ongoing revenue stream. A recurring revenue model also provides ongoing payments over a potentially long period of time, which can be a tremendous boost to cash flow.
The manufacturing and industrial sectors, including specialty products, haven’t traditionally been among the industries able to take advantage of the benefits of a recurring revenue model. However, this is starting to change. In a survey1 conducted by CFO Research and Salesforce, 53 percent of senior finance executives indicated that at least 40 percent of their companies’ revenue is generated via a recurring revenue model.
Also, 23 percent of respondents said that they’re incorporating a recurring revenue model as part of their strategic planning, and 17 percent said they have plans to implement a new recurring revenue model soon.
Practical Hurdles to Success
While the idea of a recurring revenue model for the manufacturing and industrial sectors sounds good in theory, in practice there are some significant operational hurdles. For example, traditional systems designed for transactional business can have a hard time handling service upgrades or add-ons. On the operational side, ordering and invoicing can frustrate both internal and external stakeholders, including customers.
In fact, about two-thirds (65 percent) of respondents to the CFO Research/Salesforce survey who had launched a recurring revenue model for a product or service said they’ve faced operational issues. These problems included an inability to manage, track and process revenue and use metrics typically utilized with a recurring revenue model, as well as not having tools needed to manage the data generated by subscription sales.
Also, about half (48 percent) of survey respondents said they struggle to meet reporting and accounting challenges that arise due to the unique types of customer relationships that develop with a recurring revenue model.
Another challenge of implementing a recurring revenue model in a manufacturing or industrial business is the need to make modifications to IT systems. One of these is the need to bundle upgrades and add-ons purchased by customers. If a traditional IT system generates a new SKU for each change to the bundle, there will be a confusing mix of bundling, distribution and pricing combinations.
Steps to Success
Communicating to all stakeholders and building awareness of new processes and departmental roles are critical steps when it comes to successfully implementing a recurring revenue model. Failing to do so can result in a number of negative impacts, including the following:
- Inaccurate reporting and forecasting and improper implementation.
- Pricing and invoice disputes and collection problems.
- Frustrated customers and subscription terminations.
- A lack of coordination between the sales, finance and operations departments.
To avoid these and other potential negative impacts, manufacturing and industrial businesses adopting a recurring revenue model should implement proper IT system tools that are equipped to accommodate the model. Other success steps include the following:
- Provide for daily interactions between finance and accounting, sales and service personnel to coordinate customer relations as required.
- Employ new processes that support operational and IT systems that support a recurring revenue model.
- Create new metrics such as customer acquisition cost and retention rates.
- Develop technical know-how using data analytics and reporting of service revenues.
In addition, the sales and marketing personnel need to pay especially close attention to the lifecycle of customer transaction points and contract management.
Your manufacturing or industrial business could realize a number of positive outcomes by following these success steps, including the following:
- Improved forecasting and more efficient pricing.
- Greater opportunity to upsell and thus maximize revenue growth.
- Improved customer relationships.
- Real-time data generation to assist in decision making.
- A more steady and consistent cash flow stream.
Businesses in a wide variety of different industries enjoy the benefits of implementing a recurring revenue model. The manufacturing and industrial industries haven’t traditionally been among them, but this is starting to change. While the idea of a recurring revenue model for the manufacturing and industrial industries sounds good, in practice there are some significant operational hurdles. A project CFO or part-time CFO from a CFO services provider can help you analyze whether your manufacturing or industrial business could benefit by implementing a recurring revenue model.
1 Recurring Revenue Rising; Chris Schmidt; CFO.com; February 27, 2019
John W. Braine, Partner, CFO Edge, LLC