The most compelling revenue business model today is recurring revenue. Call it subscription. Call it Software-as-a-Service (Saas). Call it recurring revenue. These are business models that deliver ongoing customer value that is paid for on an ongoing basis. Lots of models exist out there in the digital and real worlds. Examples include co-working spaces, software subscriptions, e-commerce, Costco, corporate wellness applications, and the list goes on and on and on. But these great business models still face a fairly risky underside for entrepreneurs (and their investors) that are having a hard time seeing the real business metrics clearly enough to make actionable decisions.
This post isn’t for the companies that have invested hundreds of thousands or millions into the recurring revenue management accounting infrastructure. No, this is for companies that might be doing $1 million to $5 million in recurring revenue, growing quickly and using QuickBooks Online to manage their accounting.
Here are the 5 problems that most accounting systems simply mask because they aren’t set up to manage these metrics that matter.
1. Are we growing logos or wallet share? Growing number of customers (“logos”) and growing more revenue per customer will show up in bookings and recurring revenue. But you want to track each of these separately. High growth companies that are not adding logos may speak to a slowdown in adoption. Companies that are not evidencing an ability to scale within accounts may risk higher churn if they can’t penetrate deeply.
2. Are we growing bookings or revenue? You may show growth in recurring revenue but that does not tell the story of whether you are booking future revenue at sufficient growth rate. If churn is low and you are signing up some new customers, you may see decent growth in monthly recurring revenue (MRR) even though bookings (new sales) may be slowing.
3. Are we acquiring customers at a reasonable cost? Knowing your customer acquisition cost helps you determine how effectively you are using dollars to deliver a value proposition and convert a customer. But are you capturing all the financial info from your accounting system that goes into customer acquisition cost to even know? This data needs to be mapped to your marketing automation system to properly calculate.
4. Are we getting better at customer acquisition? Are your quality of customers improving on a monthly basis? Are you getting better at targeting the right customers that will stay longer? You want to know how your cohorts (groups of new customers) are trending on a regular basis in order to assess effectiveness in matching your value proposition to a target customer.
5. Are we stemming the leaky bucket of churn? Ah, churn! The big beast. If churn is 5%/month, that means that in 20 months you will have lost all of the customers you acquired in a given month. Yikes. It costs a lot to acquire a customer so try and keep the ones you have. But how is churn trending? By cohort? By campaign? Churn is the nasty dark side of the recurring revenue business and requires maniacal attention.
At Stride, we understand recurring revenue accounting and how accounting data interacts with marketing automation and ancillary spreadsheet data you may be keeping in order to just try and keep everything straight. The stakes are getting higher and higher as more sophisticated investors and partners ask questions that they expect ready answer to. Spending less time getting the data organized and more time analyzing the right actions is the expectation for most CEO’s. We can help you get there.