By JJ Xia, Director of Product Marketing at Zuora
You can’t build a great building on a weak foundation—the same goes for your business. Here’s why you need a three-cloud architecture.
Since 2000, over half of all Fortune 500 companies have disappeared. This is digital disruption at work. And whether you’re in software, high tech, auto manufacturing, fitness, retail, or any other industry, you can feel the shift happening.
To be competitive in this digital age, modern businesses are realizing they need to understand their customers through their usage patterns and buying behavior. As a result, companies are racing to become customer-centric, designing business models to build and nurture ongoing customer relationships.
If you don’t yet know your customers, trust me…someone else already does:
Uber tracks your transportation behavior. Peloton understands your fitness behavior. HBO knows your viewing and buying patterns. Amazon, Warby Parker, and other brands know exactly what you like before you ever walk into a store. That is the future of all business: customer focus, not product focus.
Across every industry, companies with success stories are customer-focused in three specific ways:
- They deeply understand their customers through usage patterns and preferences.
- They find a way to tie what customers value into the revenue model. These companies focus on getting customers to use more and more of their product—and that ultimately drives growth.
- They own the billing relationship with their customers, rather than letting Apple, Google, or another platform own the relationship.
THE PAIN POINTS OF MOVING TO A CUSTOMER-CENTRIC MODEL
Companies trying to make the shift to be more customer-centric face the same challenges:
- Pricing and packaging. It takes a long time to launch new pricing and packaging, which makes it difficult to move fast to keep up with smaller, nimbler competitors.
- Acquiring and nurturing customers. To acquire and nurture customers over multiple channels creates data headaches.
- Processing subscription changes. Offering customers the flexibility to change sub- scriptions after sign-up—such as adding more seats or a new product—causes down- stream billing complexities.
- Recognizing revenue. Accurately recognizing revenue becomes increasingly difficult and a manual pain.
- Accessing key metrics. Calculating key metrics such as Annual Recurring Revenue, Net Retention, or Average Revenue Per Account is difficult and time consuming.
Many companies will try to muscle their way through these challenges with brute force, but ultimately these operational challenges—if not addressed—will become a bottleneck to a company’s growth.
HOW A TWO-CLOUD ARCHITECTURE BREAKS THE SUBSCRIPTION BUSINESS MODEL
What causes this bottleneck? It always comes back to a company’s existing IT architecture.
Most companies today anchor the heart of their business model (the order-to-revenue or order-to-cash process) on a two-cloud architecture. One cloud is a Customer Relationship Management system (CRM) to manage interactions with prospects and customers. And the second cloud is an Enterprise Resource Planning system (ERP), which businesses use to manage a variety of day-to-day business processes like accounting and supply chain operations.
But stitching together a CRM and ERP does not work to manage the dynamic nature of a recurring subscription model and all the related business processes.
Why? Let me net it down to three reasons:
- It’s too hard to monetize a product “as-a-service” in a two-cloud architecture. CRM and ERPs were built to sell products, so everything rests on the concept of a SKU (stock keeping unit). But subscription companies monetize products “as a service” through a variety of pricing strategies—different editions, usage-based pricing, tiered pricing, overages, recurring billing, and more. When companies try to retrofit these strategies into a SKU- based two-cloud architecture, they inevitably need hard- coded customizations and mountains of custom logic.
- Evolving the go-to-market strategy leads to more hard code and customizations every time. After the initial launch, plans to expand internationally, add a second product line, focus on upsells, and more are all common strategies to sustain growth. The problem is, every new strategy requires the IT team to rewrite hard-coded logic— and rewrite again in response to every new go-to-market strategy. That’s because CRM and ERP solutions are not built to support the complexities of subscription processes, nor to easily pass information between the two systems.
- Giving customers the flexibility to change their subscription after sign-up leads to added customizations—and finance headaches. We find that 70% of a subscription company’s revenue comes from existing customers through upsells, add-ons, and renewals. That’s why companies that let their customers make changes to a subscription after sign-up see greater growth, landing with a smaller product footprint and letting the customer value expand over time. Our own data shows us that B2B companies see four changes to their subscription every single year on average. But how do you support all of these change scenarios with your CRM and ERP? For every single possible scenario, your IT team will
need to hard code a solution to anticipate the downstream impacts on order management, billing, collections, revenue recognition, and reporting. And if they don’t, the burden will fall to your finance teams to handle every scenario manually as a one-off.
WORKING AROUND THE BROKEN TWO- CLOUD SYSTEM
Over the course of our work with over a thousand subscription companies, the pattern has become clear—a two-cloud architecture inevitably forces companies down the path of hard-coded customizations.
As IT teams realize this, we’ve seen some creative workarounds:
- “Better to have manual workarounds than a hard-coded mess.” Some companies ask their finance departments to take on the burden. Every new customer order is manual, every invoice change is manual, every revenue contract modification is manual. While this is manageable for a small company with ~30 customers, it’s not manageable as companies grow.
- “Better to have a CPQ than nothing.” There’s a misconception that CPQ fixes everything. It doesn’t. A CPQ system is simply a channel for your assisted sales team to create quotes. After the quote gets created, it gets tossed over the wall to the finance team and the same havoc ensues. This magnifies if your company sells through multiple channels.
- “Better to build a simple billing solution than have nothing.” Most commonly, companies just want a quick fix—so they build a homegrown billing solution or adopt a cheap, API-friendly recurring billing solution just to be able to send out some invoices. That works okay if you’re selling a $9.99 subscription, but it immediately breaks when a company’s go-to-market strategies start to evolve because there are
a whole set of dependencies throughout order-to-revenue operations that are impacted that a point billing solution can’t solve for.
SUCCESSFUL SUBSCRIPTION COMPANIES HAVE A THREE-CLOUD STRATEGY
There’s a better way.
Because of the dynamic nature of subscriptions, subscription businesses need to adopt a three-cloud architecture strategy with:CRM/eCommerce as the acquisition channel
- CRM/eCommerce as the acquisition channel
- ERP as the general ledger
- And an end-to-end subscription management solution in the middle
The subscription management solution is responsible for all order-to-revenue operations, enabling you to price, rate, bill, collect, recognize, measure, acquire, and nurture your subscribers.
As subscriptions are added or modified, all of those transactions are captured in one system of record. As your business’ go-to-market strategy evolves, every impact to order-to-revenue operations is contained within one system.
That’s how Zoom, NCR, Symantec, eMoney, Carbonite, Servcorp, and countless other companies have been able to drive subscription growth. A three-cloud architecture enables businesses to monetize products-as-a-service with ease and quickly expand or pivot to new growth strategies.
It’s a seemingly small, but significant, paradigm shift—that makes a world of difference.
Continue reading other inspiring stories of digital transformation in the latest issue of Subscribed Magazine!