Last week we talked about why businesses are increasingly moving to the recurring revenue model. Not only is annual recurring revenue predicted to be $500B or more, but the model also generates immediate income gains as well as provides potential to sustain long-term revenue through increased customer lifetime value (CLV). Businesses choose recurring revenue for a variety of reasons that include: increasing the top line, enhancing customer experience, and increasing customer loyalty, among other things.
But just as with any business model restructure or implementations, there are challenges to anticipate and a plan of action that is ready to put into play. According to a study by Ventana Research, the five most significant challenges for companies adopting recurring revenue strategies are: customer engagement, cross-selling and upselling, customer retention, creating new accounts, and invoicing.
More than half of businesses surveyed cited the most common challenge is maintaining customer engagement throughout the lifecycle, which can positively affect the business in many ways. Ongoing positive interactions can increase renewal rates, which are a “key driver of profitability… because of the relatively high cost of adding a customer.” Additionally, strong customer relationships and loyalty are built on positive interactions, which also decrease churn rates. Customer retention is the third most common challenge so it’s important to focus efforts on increasing engagement while decreasing churn. There are multiple touch points, or revenue moments, that you can interact with your customer beyond service calls or inquiries. Think of every opportunity you have for interaction (welcome email, invoice, email alert, etc.) and build it to provide a satisfactory experience.
Nearly half of business cite the cross-sell or up-sell as another major challenge of moving to recurring revue. This challenge could be caused by a number of things. For example, if your product or service does not offer an extensive product catalog that provides the opportunity for cross- and up-sells, you severely limit the ability to offer options for customers to expand their purchases based on need or usage. The challenge can also be related to an inability to effectively engage with the customer. Ventana Research cites a number of internal factors that might contribute to this, including: poorly designed marketing programs for existing customers, a lack of people or incentives for continued interactions, or technology limitations that prevent companies from creating or executing effective customer nurture programs.
More than one-third of participants identified creating new accounts as problematic while one-third mentioned issues with invoicing. These issues often arise because of inadequate technology, inappropriate software use, or a struggle to acquire and integrate the data necessary for successfully creating new accounts or invoicing customers, according to the study.
Though these challenges are present, they are not impossible to address so long as you plan the strategy to overcome them. Do your research to find the best option for implementing a recurring revenue model for your business. From in-house to custom builds to cloud technology, the options are there – you just have to ensure your decision effectively addresses the challenges above.