Archive | 2013

In the subscription economy, 100% of profits come from existing customers

For the vast majority of recurring revenue businesses, existing customers don’t just fuel growth—they represent all of the businesses’ profits. Take the average customer relationship in the SaaS market: it takes 3.14 years to reach profitability, which for a $12,000/year subscription would mean $37,680 to hit breakeven. That means a full 68 percent of the revenue needed to achieve profitability is collected after the initial contract. This means profitability stems first from ensuring customer success and then growing the relationship. That percentage gets higher the further you can extend the lifetime of a customer and as the relationship becomes more profitable. In our research, we’ve found that the most profitable, best-performing companies realize 90 percent or more of a customer’s […]

The Truth Behind Recurring Revenue Growth in Subscription Economy

Goals for revenue growth change over the lifecycle of a company, in both magnitude and composition: Early stage startups want 100 percent growth or more. Late stage startups aim for 60 to 80 percent growth. Companies near the public offering stage are in the 40 percent range. For public companies, growth objectives start to fall below 20 percent. As companies mature, growth begins to blend new customer acquisition with existing customer upgrade and add-on sales—and for the best-performing companies, an increasing percentage of growth comes from existing customers, year over year. In fact, for these best-performing companies, our research shows a direct correlation between average customer lifetime and percentage growth contribution from existing customers. To better understand this dynamic, consider […]

Usage Capital™: A New Basis for Corporate Valuation in the Subscription Economy

On what basis do you typically value a company and reward its executives? Executives know the criteria: Profit. Assets and liabilities. Brand. People. Customers. But that’s how executives approach valuation in the traditional supply chain economy. Are those criteria sufficient in the new subscription economy? Consider a growing company like subscription car-sharing service Car2Go. They claim hundreds of thousands of customers, but their revenue is based on the actual car usage of those customers. The valuation question then quickly becomes how often and how much do their customers use the cars? Is car usage going up or down, and how quickly? It’s the car usage by customers—not the raw customer count—that is the primary driver to revenue, profit, and hence, […]

99 Reasons to Care About Customer Usage

In the Subscription Economy, purchase-to-use is winning, and purchase-to-own is on its way out. Why? It’s simple: We only want to pay for the value we receive from a product or service—and we only receive value when we’re using that product or service. As the following graphs show, current subscription models could see as much as a 99 percent erosion in revenue based on some usage profiles—unless providers can develop strategies for pricing and customer adoption that prevent that loss. The evolution from purchase-to-own to purchase-to-use is inevitable, even though it will vary by industry and customer segment. The last research alert documented how this trend might evolve in B2B SaaS, while this research alert will show impact to […]