Subscription businesses are the new black. It’s a financial model that defines success not in terms of a single transaction, but by the value derived over the lifetime of the relationship. Subscription is a model that most businesses are either considering or have moved to, and for good reason: International Data Corporation (IDC) claims that by 2018 “50% of all industries will be disrupted by a competitor from outside the context of their industry that embraces this new economic business model.”
Subscriptions add predictability and certainty to the balance sheet. It can open the doors to new customers who cannot afford major capital expenses. It also complicates accounting and commission calculations beyond the capabilities of most Sales Performance Management (SPM) solutions.
With subscription businesses, there are significantly more metrics to consider vis-à-vis traditional business models—things like monthly recurring revenue (MRR), annual recurring revenue (ARR) and lifetime value (LTV)—in addition to metrics common to all financial models such as total contract value (TCV) and customer acquisition cost (CAC).
Calculating compensation gets harder
Calculating compensation across many different plan types is one thing, but capitalizing and amortizing those costs is a whole different story. When new accounting rules come into effect in 2018, companies will need to capitalize the incremental cost portions, including those that involve sales commission, whenever contracts change. For companies that have adopted subscription business models or employ selling on commission, this is a complex undertaking.
Because of the new accounting rules, the way that subscription businesses sales commissions are calculated will soon have implications for both expense recognition and the way that companies demonstrate profitability. That means that cross-departmental collaboration is a must. As our partner OpexEngine observes, with recurring revenue “the CFO and VP Sales need to work together collaboratively and focus on the growth of the company.”
SPM built for subscription businesses
For businesses with subscription business models, notably software-as-a-service (SaaS) companies, SPM tractability is a must. That’s because each of the three phases that such businesses go through (acquire, retain and monetize) requires a unique financial strategy. During the first phase, firms typically incur losses when they invest heavily to win customers, but these businesses also have a keen eye on the expected profitability of clients throughout their entire relationship, well beyond the initial transaction. In the retention phase, they fine tune their business model to retain early-won customers and recoup losses over a longer period of time. In the third phase, firms often concentrate on revenue expansion by monetizing existing customers through up-sell and cross-selling products. This phase also relies on more sophisticated inputs to sales performance strategies, including industry benchmarking, market intelligence, and machine learning techniques to inform the company’s plans.
Each of these phases requires a different accounting treatment, and each treatment needs to take sales commissions into account. Switching treatments and capitalizing and amortizing compensation costs is beyond the capabilities of most SPM systems. Luckily there is a new breed of SPM built to handle both the traditional perpetual license model (one-time transactions) and subscription business models. It’s faster, more dynamic and comes with a much greater level of functionality than traditional SPM.
Obero SPM is a single integrated platform built for subscription businesses sales performance management. Subscription business executives tend to like it. Carl Benefiel, Vice President of Operations for HotSchedules explains why he chose Obero: “We moved to Obero SPM because our other tools just weren’t able to keep up with our business. A SaaS business is different, and Obero gets that.”
For more information about Obero SPM’s incentive compensation management capabilities:
Are you ready for the upcoming regulatory changes regarding revenue recognition?