Subscription-based Value up to Eight Times Higher than Traditional Revenue Models
A high percentage of recurring revenue allows subscription-based companies to easily calculate the lifetime value of a customer, manage inventory, and offer simple pricing. Keep reading to learn why subscription-based businesses are up to 8 times more valuable.
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According to John Warrillow, creator of The Value Builder System, recurring revenue is perhaps one of the most compelling factors in a company valuation. “The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be,” Warrillow says. “Because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue.”
This consistency in revenue also allows subscription-based companies to easily calculate the lifetime value of a customer, manage inventory, offer simple pricing and many other business benefits. When we look at the success of software-as-a-service (SaaS) companies, many of which are offering monthly or annual service subscriptions and pulling in multi-billion valuations, it’s more evident than ever that customers prefer subscriptions. Yet, professional service industries are falling behind. The only hope? Adaptation.
Sure, professional services firms have a monthly retainer, but these agreements are usually locked in based on pre-purchased services rendered and tasks completed. It doesn’t allow for flexibility like subscriptions do. For example, If client needs change dramatically, a subscription will give them the ability to scale work up or down, without worrying about contracts. For instance, if a client is in the middle of a website redesign, and they suddenly need to invest funds into a special product initiative they are rolling out, they have the ability to decrease their subscription for a few months. Work will still continue but at a slower pace.
On the other hand, if the client just closed a round of funding and needs to accelerate the launch of their SaaS site to satisfy investors, they can increase their subscription to increase the pace. Subscriptions allow clients the security of knowing that everything is month-to-month, and nothing is set in stone — especially scope.
Chuck Longanecker, founder of Digital Telepathy, describes in Entrepreneur magazine how he tool the plunge and changed his company to subscription- only: “Fed up with the risk and constant guessing game of scoped projects, I took the plunge and converted the business model of my UX firm Digital Telepathy to subscription only. Instead of signing project agreements or monthly retainers with a detailed scope, we simply offered all of our services under a flat-fee subscription. Clients were initially confused, but once they experienced how our new approach improved our alignment on strategy, design output and working speed, our retention rates catapulted. Since switching to the subscription model, our revenue has increased by 300 percent. In addition, the subscription model positively impacts our clients by providing results that are aligned with their business objectives, not just a project plan. In other words, we went from creating project deliverables to being an extension of their team and impacting their bottom line.”
Is it easy? No. I described the process in a previous blog post just how difficult it can be. Is it worth it? Absolutely!
Adapting ERP to Subscription / Recurring Revenues for Professional Services Firms
Microsoft Dynamics 365 for Finance and Operations, Enterprise, is one of the most attractive enterprise ERP solutions that lends itself to a recurring revenue model, but not everything a software developer, publisher or reseller requires is provided in the solution right out of the box. No worries, because we have already tackled this one for you. SBS Group has created AXIO for Professional Services, an enhanced version of Dynamics 365 that caters to the needs of enterprise professional services firms.
To my knowledge, AXIO is the only partner solution capable of managing the entire business process and handling the complexities of the latest revenue recognition standards and subscription billing on Dynamics 365.
The benefits of subscription-based revenue are clear: flexibility, scalability, stronger customer relationships, avoiding danger of lagging behind, increased revenue….Let us help you transition today!
Robbie Morrison has spent nearly 20 years helping customers build and deploy elegant technology and business solutions. From start-ups to enterprise-class organizations worldwide, his knowledge of the Microsoft Dynamics ecosystem and products helps Velosio customers maximize ROI on technology investments.
Today, Robbie serves Velosio customers in his role as Chief Solution Strategist where he provides thought leadership and manages the development of B2B solutions. Robbie received his MBA from the University of Georgia, Terry College of Business. https://www.linkedin.com/in/robbiemorrison
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