The world is not what it is used to be. A year has gone by since the world is gripped by the uncertainty caused by a global pandemic. With vaccines being rolled out, many of us wonder what is the “new normal” mean for our own family and business. The economy, business and finance does not seem to react normally. This is apparent when Apple’s shares slumped more than 3% despite the company said its holiday quarter broke nearly every one of its financial records. Revenue of $111.4 billion, up 21% from last year and $8 billion more than what analysts had expected, was a record. Profits of $28.8 billion, up 29%, was also a record, as was the sales total in every geographic region and in most product categories. This is mind boggling, right?
So, what should we be looking at to reduce impacts of uncertainty to our business? The answer is sustainable recurring revenue. I use the word sustainable because not all scenarios and sales revenue simulations are sustainable. Let us look into some of the facts:
Why Recurring Revenue?
Median ARR multiplier for software company valuation that does recurring business is up to 16.6 times. A company valuation is now determined by Annual Recurring Revenue (AAR) x company’s growth. IDC FutureScape in Worldwide Monetization 2021 Predictions in October 2020, states that 51% of software revenue will be recurring by end of 2021. But’s that not all, we all know by now that software will be a key driver for all sorts of businesses and industries. This is propelled by the pandemic, and wider population in adopting faster mobile internet such as 4G, 5G and fiber connectivity.
Recurring Business Tip 1: Business Test Model Team
Develop a test model with a small creative team that will add recurring revenue on top of your business. When creating recurring business model, we should not replace our existing one-time revenue business. Your core business is your strength and lifeline. Instead of jumping into a new boat with all the baggage, assign a small, dedicated team to create the model. Within a short period of time, the same team should test out on existing customers. This allows a faster turnaround for feedback and improvement. All these development and testing can be easily done in a cloud’s world. This is achievable via a flexible pay-per-use and self-service model. Your team and vendor are able to create a test software in the cloud in a fast and agile manner. If it does not work, you can turn it off without any other commitment.
Recurring Business Tip 2: Compensation Plan
In my research across several industries, I often find out that good talents will stay in a company when their recurring commission is intact. For example, insurance agents who do not earn basic salary depend on their recurring commission to profit, are one of the best breeds of salespeople. To have sustainable business, we need good talents in the company. Thus, we need to create a compensation plan that is easy and recurring for them. For example, my company uses contract revenue size (either multi-year or multi-month contracts) as key indicator of sales performance. Then, the salespeople are being paid a certain percentage from the revenue. This makes it easier for them to calculate the compensation plan and aggressively pursue a longer sales cycle project.
In order not to impact cash flow, the commission can be payable across multiple quarters as long as they meet the sales quota for each quarter. This will consistently drive further sales performance. Good salespeople should not be penalized for low gross profit margin, nor inability to collect payment, simply because that is your responsibility as business owner/CFOs and not them.
Recurring Business Tip 3: Payment Collection Solution
In my financial year 2020, Cloudify.Asia managed to collect every single payment promptly, even from a blacklisted customer. And no, we do not have a dedicated collection person, nor outsourced a team to do it. From your customers’ point of view, it is easier to pay for smaller number of invoices than a large chunk during a crisis. They prefer to deal with less vendors chasing for payment than to deal with various vendors that has small overdue payments. Using cloud automation and software automation, they would be able to pay your bills promptly. Auto debit facilities by bank can also be used, although this process seem to be manual now in Malaysia. Enabling self-service portal for your solution in the cloud is important to enable your customers to view the bill and pay accordingly.
Recurring Business Tip 4: Personalization
Personalization will be a key differentiating factor for your solution with a competitor. Using machine learning in the cloud, you can rely on sophisticated calculations to create a unique bundle for your specific customer. For example, one of the telco’s CEO dream is to be able to personalize a post-paid plan for individual customers based on their usage. By leveraging on the behaviours and past usages, it is possible. This also helps to increase stickiness to your recurring business model. Speaking about stickiness, subscription model based on recurring methodology has higher loyalty from both consumer and corporate by default. This is due to the ‘ease of doing business’ mindset. Customers will have a mindset that your solution would need to work consistently or else they could withhold the payment.
Thanks for reading this article. Cloudify.Asia consists of cloud professionals that want to drive your business revenue through the right cloud native foundation. We are keen to learn about your business and to provide ideas so we can grow together. We may not be familiar with your industry, but we are experts in cloud to be able to provide you the right tools to actualize your next digitalization transformation ideas. Contact us!
Written by Gavin Loh (Chief Opportunity Creator)