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Five Trends and Tipping Points in the Subscription Economy for 2014

With over 120 customers and more than $3.3 billion under analysis, we get to have a big-picture perspective here at Scout Analytics. We collaborate with our customers continuously on new strategies for accelerating recurring revenue growth, and that’s helped us identify certain trends emerging across industries—common themes that show the potential for tipping-point dynamics. Below are the top 5 trends which we predict will hit a tipping point and start to take hold more broadly in 2014: #1: Pay-per-use will drive market growth When Salesforce.com launched its per-user per-month subscription model, the pricing wasn’t aimed at big enterprises already implementing Siebel or other on-premises software packages. The new model was aimed at the unserved SMB customer segment—and this created huge […]

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, […]

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