July 6, 2012
By Tom Dibble,

Why Recurring Relationships Trump Recurring Transactions

More and more companies are going to market with offerings that generate recurring revenue. Over the last decade, executives, investors, and analysts have recognized that recurring revenue models make a lot of sense—benefits include predictable revenue streams, ability to scale revenues with costs, lower cost of sales, and higher lifetime customer value.

For companies that choose a recurring revenue model, there are significant competitive advantages. Consider Netflix, a subscription-based business, and Blockbuster, a business based on one-time transactions. Netflix grew its business with a low-cost subscription service based on a flat-fee pricing model. In contrast, Blockbuster developed a subscription business, but only after the company had lost significant market share to its competitor. Ultimately, it was too late for Blockbuster. Clearly, customers preferred the cost and convenience offered by Netflix's subscription model, thus enabling the company to quickly grow its recurring revenue business.

For companies that choose to offer products or services via a subscription model, a critical key to success is having a billing system that can support the full customer life cycle, from subscriber acquisition to billing to customer care—a process that can be inherently complex. For instance, even a single online transaction can become incredibly complicated due to usage rates, foreign currencies and exchange rates, regional and international sales tax, and other issues. This complexity grows as additional transactions of other types are introduced.

So how can companies successfully execute a subscription-based recurring revenue model? At a high level, companies need to abandon the one-time transaction mindset, instead focusing on the management of longer-term customer relationships, which involve both single and recurring transactions on an ongoing basis.

Out with the old, in with the new

Historically, accounting systems have been designed to look at past transactions—P&L, balance sheets, cash flow—to determine the financial condition of the business over a given period of time. Unfortunately, many companies have built their businesses on existing accounting systems, which are ideally suited for one-time transactions. These systems do not support the current realities of online, subscription commerce—real-time customer interactions where subscribers can change plans, request support, or have their purchases fulfilled immediately.

A common mistake made by companies is using an online merchant platform for facilitating recurring transactions, such as credit card, debit card, or bank account transactions. While this type of system can manage the transfer of funds between one party and another over a recurring period, it isn't equipped to handle customer sign-ups, turn on services, track usage, or manage customer disputes. Companies that do integrate an e-commerce platform into their subscription model are often left to resolve customer issues through manual intervention.

Finally, companies that wish to be successful with a subscription-based business need to shift their focus from transactions to building and fostering a recurring relationship with customers. Ingersoll Rand, a diversified products leader and maker of the popular Schlage locks, updated its one-time purchase model to introduce a new subscription-based service. The "Schlage LiNK" service allows subscribers to control home temperature, lighting, and security remotely with their mobile devices.

Another example of a company that has made this successful transition is Pitney Bowes. This 90-year-old communications provider leveraged a subscription-based model to extend its business into small and midsized organizations in multiple countries. By using a cloud-based billing system, the company saved significant time and money in quickly rolling out this new SMB service while ensuring go-forward flexibility to evolve pricing and packaging as customer needs and market dynamics changed over time.

These two examples are clear proof points that switching to a recurring relationship will not only drive business, but create an improved experience for the customer as well.

Tom Dibble is president and CEO of Aria Systems, a provider of cloud billing and subscription management solutions. He has more than 20 years of enterprise experience, including serving as vice president of worldwide channels and alliances for Oracle and vice president of worldwide channels and alliances at BEA Systems.