4 Key Trends Fueling Recurring Revenue Adoption

Watch the Webinar: Evaluating Subscription Billing

Forrester Research recently released its evaluation of subscription billing vendors. Called “The Forrester Wave™: Subscription Billing Platforms, Q4 2015,” it examines the top vendors and how they stack up against each other. Some of the most intriguing of its many conclusions center on why the analyst firm chose to produce this report at this particular time. The answers may surprise you.

Why now?

The short answer to the question of why now is that Forrester’s customers requested it. In the three years since the company released its first report on subscription billing in general, the category has become much more established and so has interest in it. That’s according to Lily Varon, a Forrester analyst for eBusiness and channel strategy and one of the report’s co-authors.

In remarks made last week during the Evaluating Subscription Billing webinar in which Lily was a guest speaker, she noted that Forrester’s clients now wanted to know, “What are the differences between these vendors? Who are the leaders?”

We’ll get to the leaders in a minute. First, let’s take a closer look at the reasons why companies are so eager to learn more about subscription billing just now.

The great convergence: 4 trends that are fueling recurring revenue adoption and monetization

According to the Forrester Wave report, what’s driving interest in recurring revenue is the convergence of the following four trends:

1. Growing demand for “stickier” customer relationships.

As we enter what Forrester calls the Age of the Customer, “companies must become customer-obsessed as never before. “What that translates into is a higher touch, longer-term relationship with the customer,” Lily said. Companies are eager to generate incremental revenues with loyal customers. One big reason why is that it’s far more expensive to acquire customers than to retain them. With recurring revenue models, you acquire a customer only once, not over and over again as in traditional one-time transactions.

Indeed, according to Aria Systems Co-Founder and Chief Evangelist Brendan O’Brien, lower acquisition costs are one of the key reasons why Wall Street rewards recurring revenue business models. Speaking as a co-presenter in last week’s webinar, Brendan noted that companies that can manage to build “annuities based on an initial customer acquisition cost that need not be repeated are enjoying large multiples in valuation.” Case in point: Netflix.

2. Greater need for customer insights.

This trend is closely linked to the first one. Long-term recurring payment relationships depend on retention, the ability to satisfy the same customers over time. In order to do that, you need to know them very well.

That knowledge requires insight, which recurring revenue businesses are uniquely positioned to glean through multiple customer interactions. “You’re not limited to just seeing their purchases,” O’Brien observed. “You can actually see, if you’re doing this correctly, the way that they’re consuming your service, on an individual basis, on a cohort basis, on a macro basis.”

This sort of customer usage data is expanding rapidly with the advent of connected devices and the Internet of Things. Insights from this data enable savvy recurring monetization companies to continuously adjust their pricing, packaging, incentives and engagement tactics to deepen customer relationships.

3. Increasing drive to capitalize on the cloud.
Business is shifting to the cloud. According to a recent estimate, the global cloud computing market will more than triple to over $300B a year by 2020. The connection to recurring revenue? Cloud services are purchased through subscription or consumption mechanisms.

“When firms migrate or reinvent their products, their businesses, whatever their services are, for the cloud, invariably, they’re migrating to subscription or usage-based monetization models,” Lily says.

Cloud-based services are transforming virtually all industries. Along the way, they’re generating significant incremental revenues for the companies that provide them. For example, Amazon, a stock market darling, has begun to turn a profit only within the past year. In its most recent quarter, its cloud-based Amazon Web Services (AWS) accounted for more than half of company profits.

4. Rising availability of connected products.

As the inexpensive sensors and smart chips of the Internet of Things (IoT) proliferate, more and more companies are seizing opportunities to connect devices and services in compelling new ways.

With IoT, the performance of industrial machines, medical devices, cars, highways, warehouses, personal electronics, home appliances and business equipment can all be monitored—and, in many cases, repaired—remotely and in real time.

“Entirely new service offerings are being packaged around these devices themselves and all of these services are being offered up on a subscription or recurring basis,” Lily noted.

Read the report

As the Forrester Wave report shows, recurring revenue is gaining steam big time. So who are the leaders in the recurring billing space? We don’t want to spoil the surprise. For more insights, watch last week’s webinar.