Dummy eat rhizoma coptidis, misunderstood SaaS subscription model

cloud network hunting note: through a subscription model sell SaaS (software as a service) business, is full of potential for future electricity field poles, or in the guise of investment, in the form of short term losses to cover up the inadequacy of this business model? This is a question that many things.

the subscription model is to let potential customers to try the product first, and then expect a portion of them into buying full price of commodities or more a sales model. In fact, based on the pattern of ordering SaaS business the company is developing in full swing, the most important reason is that the user may not because of software updates, etc. In a few years. Today, the user needs to upgrade faster development speed, also do not want to deal with complicated software installation, maintenance management and applications, and features such as the flexibility of a subscription model can help users solve the problem above all.

this article will from Ron Miller and Alex Wilhelm two veteran’s point of view, elaborated the advantages and disadvantages of subscription model, and to explore its feasibility, what is the issue of cost accounting method, or the way they operate and high investment of the fundamental problems.

argument: one of the traditional accounting method is applicable?

since this year, the Wall Street for the subscription model of the company to appear on the balance sheet, usually. However, the traditional accounting method may not apply to these companies. Designed for subscription service to do the billing and accounting management of the SaaS provider Zuora (ZuRui technology), the founder and CEO ZuoXuan whether (Tien Tzuo) said that the current accounting system not tailor-made for subscription model company, can’t even predict regular income.

, for example, Dollar Shave Club provide monthly order razors service. If there are ten clients, each user to pay $5 a month of the year for ordering razor, even though we all know that the subscription model long-term profitable amount is: $10 x5x12, but it is not possible to the total costs of customers ordering the razor in my life, once booked. In this case, the traditional accounting method is not applicable.

when further to see when the enterprise and the company’s cost accounting system, this kind of circumstance also exists, the amount is more big.

tien tzuo

if the former firm time not clear regular income, is understandable. For example, a company to supply a large number of contract, and provide a repeatable business services for a long time, and then told investors that the company’s operating model is based on the presumption of contracts have been concluded. As a result, when charge to an account in accordance with the general accounting principles (GAAP) and not by the general accounting standards (Non – GAAP) can produce small differences, and even the most basic financial business people will find the difference.

when a company’s total revenue is a regular income, this problem is more pronounced. In this case, they have to bear the loss of short term, in order to win long-term regular income. Of course, this is also a small number of extreme example.

for a long time, the enterprise source of income can be divided into regular income and non regular income. One of the big four U.S. Internet giant AOL also has a large number of regular source of income, namely the dial-up Internet access business. Although the SaaS revenue is somewhat different, but still belong to the category of regular income based on the contract.

often have such cases, when a company is in high-speed development period, in the short term, the influence of the regular income will be cover in the following situation: the company has a batch of long-term customers, on the cycle of charge to an account book has a large amount of money flowing water, as well as a higher gross profit margin. At this point, relative to the customer lifetime value, will appear in the early period of the high costs, and increasing regular income record is distorted.

argument # 2: the proactive can translate into direct income?

Order modes

in fact, the biggest problem is that the early stage of the need for each user to spend a certain amount of money, and the amount of the funds with the development of enterprises will rise sharply. Then, in a year or two after a time node, according to customer’s size, businesses can begin to profit, while the income will be the net profit.

in the same way, based on the subscription model of SaaS company’s problem is that the need to build a scale powerful sales team to achieve customer, resulting in huge upfront costs. In some level, this has to do with the traditional sales model is not too big difference, is through the early into looking for target customers, and to explore more potential customers.

when the company’s accounts through traditional cost accounting method to analyze their listed securities registration form will not good-looking, there will be a lot of deficit and loss, as well as capital inflows. If the mode of operation is correct, then based on the subscription model company will get more and more income. Perhaps, if Wall Street financial giants from a different Angle to look at these companies, will get some more favorable information. Company based on the pattern of order though capital is flowing water, but because do not accord with a standard accounting rules, even if has not included in the accounts as well as income.

or, really need a new accounting method to analyze this problem; Or, in the financial statements provide a row, according to the known regular income; Or again, look at the Wall Street companies can turn, from another Angle to explain the definition of success.

why SaaS company revenue with the high cost? Ron Miller in this paper talked about the common problems about SaaS revenue, namely “business before pleasure” pattern: early losses, then to earn profits.

a few large SaaS companies spend more than three times the cost of sales, to build a nine digit annual recurring revenue plan. As you can imagine how big is the cost of doing so, not all companies are willing to do so.

so, about “SaaS company is full of potential for future electricity field poles” argument, remains to be proven. The biggest question is that if, as stated above, SaaS revenue at the beginning of the development in the later will become net benefits, so why is the cost of the enterprise is unable to reduce excavate the potential customers? But over the next eight years or longer time, keep the costs of revenue and sales market open flat, is not conducive to further reduce differences in accordance with generally accepted accounting principles of charge to an account, it’s hard to explain.

even if SaaS company profit point in time is coming, that its revenue can quickly become a net profit, this data can be proven. Why not profitable sales market, because the use of traditional accounting method? Or is a SaaS company’s rapid growth make long-term losses is understandable?

argument # 3: a subscription model is better?

there are many company is based on the revenue model. Subscription model of all such great potential, because it is not a repetition of forcing customers to buy the product, but by providing a reasonable response to the needs of customers service, as long as in service, the customer is in.

the opposite is the traditional boxed software sales model. Often, software developers take several years to update the software, and the client side to spend large sums of money to upgrade the software. And if it is under a subscription model, the software can be constantly updated, customers without waiting for at the same time also benefit from the massive construction of the latest software. The

due to the more attractive to customers, based on the pattern of ordering the company can look forward to get more revenue from the common customers. Selling to clients is not an entirely new product, but a kind of service, and as long as customers accept this service, sales link come to an end. Follow-up, of course, also hope to harvest more from the customer interests, but the most difficult step has been completed when it has been in the customer accept subscription.

in this way, will help decrease the cost of sales, marketing and time, at the same time, the cost of mining the customer will be flat. This requires a small change in cognitive, but it has been a real example, Zendesk as the leading brand in the United States the cloud customer service platform, mainly to provide customers with internet-based SaaS customer service/support management software, successfully listed at the beginning of this year, and good performance. Perhaps, need more of these examples, Wall Street will have a good look at these order modes based on the company, its revenue is far less than the company sells a single product more attractive.

suppose SaaS company has completed the excavation customer money, which usually account for about a third of customer lifetime value, so the margin will have risen sharply. This is completely in line with a view that SaaS company once sold, will soon become a source of profit. If this analysis is correct, can be published in the real financial data between different companies’ financial health.

a established companies as examples: order modes if Microsoft now hopes to sell Office software, with boxed version based on the amortization cost of Office software, Microsoft in the subscription model money perhaps more than ever before. But Microsoft is now also facing high server, communication frequency band and other costs. Therefore, the operation mode of different really leads to profit situation change?

in addition, there is the problem of sustainable development, is to use three years to develop a product, after the release of further updates, or updated once a week, what a way to more cost savings? Different companies may have different choices. But for a company based on a subscription model, each will be faced with the continuous research and development, and other promotional items cost, at the same time, the difference between gross margin and net profit will be widened.

the place on put together is narrated, SaaS companies have huge revenue growth potential, but at the same time should pay attention to, can’t see all the losses as reasonable up-front investment. In fact, from the “old model” for the company, selling software through a subscription model cost may be higher than expected for a long time.

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