Let’s start this blog like a good Quentin Tarantino film, with the end at the beginning: The finance team at a peer of yours worked together to reduce net revenue churn by 2% and grew the top line at 40%, to deliver an estimated 100x return on invested capital. But how?
For context, subscription business models rely on two main levers to create business value — growth rate and net dollar retention rate. To put these metrics to use, we need to conquer the data obstacles that get in the way of our capturing and acting on these levers.
Let’s look at data from a recent presentation by KeyBanc Capital Markets SaaS research analyst, Brent Bracelin, presented at KeyBanc’s Technology Leadership Forum in Vail Colorado in August. On the first metric, a frequently cited target is the Rule of 40, where the sum of growth rate and profitability exceeds 40%. The data finds that companies achieving this target enjoy 135% greater enterprise value-to-sales than companies with a combined ratio of less than 20%.
The second metric is net dollar retention rate (NDR) — the year on year growth in value of net renewals including upgrades and upsells. The data finds that an NDR of 120% gives an enterprise value-to-sales ratio — the ratio between sales and equity valuation — a massive 90% greater than having an NDR of less than 110%.
The problem is, the processes designed to track both these metrics often fail. Data gets stored in silos, becoming difficult to combine in a way that paints an accurate picture to guide strategic decision making. One potential solution? A single SaaS system of record across the quote-to-financial-forecast process, providing a unified platform for finance and revenue operations.
Ending the drama that comes with multiple SaaS systems of record
To get the most value from the subscription business model, everyone wants the data to provide clear evidence for decisions on pricing, new markets, acquisitions, and other areas. When working across data from multiple systems in adjacent departments, each only touching a part of the lifecycle, blurred results leave folks fighting over whose data represents the truth.
Just why have companies failed to create a single subscription system of record? We have written about how subscriptions are disrupting the legacy approach of the suite vendors in the financial management market.
How you manage a subscription is different than you handle an order. The legacy, order-based approach relies on just connecting customer orders. When a company relies on an order-based system to run a subscription-based business, they fail to produce data on the overall customer relationship. The old way requires the finance team to waste time and introduce errors by manually reconciling differing views of the data.
When people in different roles were asked what would end the disagreement and why, here is what they said:
- Sales ops — Native integration between the quoting system and the billing system would speed up quote-to-cash processing times.
- Revenue manager — Automated billing and automated revenue with synched item catalogs would change their job from data entry to revenue analysis.
- Controller — Faster close through not needing to validate orders and being able to track commission expenses back to the subscription would allow them to track CAC to determine unit economics.
- FP&A — More data to the FP&A team, sooner, without having to reconcile multiple systems, would allow them to run more models with more robust data, looking further out into the future.
- CFO — Forecasts and levers to lead strategic planning would help them manage investor expectations and set appropriate performance management goals for the business leaders in the company.
Getting to the holy grail of a subscription business model
There is a way for everyone to see, manage, and impact the growth rate and increase net dollar retention. Strive to have one subscription system of record across departments and portions of the quote-to-financial-forecast workflow:
- See the customer over their entire lifetime of sales.
- Empower sales and customer success to make upsells and renewals in the context of the original promises you made in order to properly recognize revenue.
- Track the original order, with upsells and renewals, all in a single subscription contract for the customer, allowing revenue operations to adjust the levers on CLTV and churn.
- Understand expenses, including commissions, to track the CAC of the contract — both the original and the blended over time costs.
- Instantly produce both SaaS and GAAP data for the FP&A team, so that they can accurately forecast the future for the entire customer contract lifetime.
RapidRatings sees massive gains with single subscription system of record
So back to our story, let me share with you the results from a subscriptions-based company who moved to a single subscription system of record. RapidRatings, a NYC-based fin-tech SaaS firm that is transforming the way the world’s leading companies manage enterprise and financial risk, installed Sage Intacct’s subscription management solution. Integrating with the opportunity in Salesforce, the team cut order-to-bill processing time by 66%. This took DSO down 20%, which in turn increased operational cash-flow 10%. At the same time, with one SaaS system of record, they could forecast CLTV, cash, and revenue, looking forward multiple years. It also positioned the finance team to support more growth, as Pete Tantillo, CFO/COO explains:
I haven’t had to staff up my accounting department to do a lot of busywork. I know that everything is completely automated end-to-end, and then there’s no need to do that. So I have a lot of comfort that as my business scales, I can manage the internal processes.
With the extra cash and visibility, RapidRatings decided to accelerate hiring for its engineering team, to tackle the list of product enhancement requests from their largest customers. This is how these enhancements led to reducing net revenue churn by 2%, and acquiring new customers and expanding existing ones, to grow the top line at 40%, with an estimated 100x return on invested capital compared to the cost of the subscription management solution.
Summing up a software subscription revenue model
Finance and revenue ops leaders have seen the data obstacles holding them back from improving growth rates and net dollar retention. It has become important enough that G2 just launched a new Grid on subscription revenue management for mid-market companies tracking customer satisfaction and new buyer research frequency on billing, analytics, and revenue recognition. This new 'Grid' shows that peer-vetted solutions to the problem of subscription management are now an established option for buyers.
For more on the stages of automating a subscription business model, check our e-book for finance leaders.