By John Kearney, APAC Managing Director, Zuora in The Australian
It’s hard to believe now, but there was a time when enterprise resource planning (ERP) was hot. In the 1990s, companies replaced ageing back-office systems with new ERP designed to offer a one-stop shop for line-of-business systems including payroll, invoicing, HR, supply chains, and general ledger. The first ERP premise was enticing: join up all your disparate engine room components for an integrated, holistic view of operations. These old ERP systems worked great when the fundamental goal of a company was to ship a product.
But a decade on, companies now face a fresh challenge: to adjust systems for a new economy where people are moving to subscriptions rather than upfront purchases, and where flexibility is critical to business competitiveness. ERP was great for managing widget inventory but today’s end users — the consumers — are all about ongoing services, not stand-alone products.
Take Uber or Go-Get. With the rise of vehicle and ride-sharing, consumers no longer need to worry about whether their vehicles have petrol, where they are parked, or if they have been serviced. The whole idea is about removing the burden of ownership and having a trusted vendor provide the service. If the vendor does not deliver, there is an alternate service down the street.
To keep up, today’s innovative companies are turning new processes and new business models that put their savvy customers at the centre. But the biggest handbrake they face is their existing ERP platforms. While originally purchased to make an organisation more efficient, these decade-old systems are now hindering the responsiveness of businesses, destroying customer relationships, and exposing them to disruption.
Here are four key problems businesses face when attempting to run a subscription business on a traditional ERP system.
1. No central place to control pricing: In the old world, invoices were based on units: I buy 5,000 units, each unit is a dollar, here’s an invoice for that. In the new world of the subscription economy, there is more than one way of pricing, and it’s dynamic. You may want to price by the user, by the gigabyte, by the month, or you may have peak pricing like Uber. But traditional ERP systems generally are not built to support the constant pricing and product iterations that define the subscription economy.
2. No historical view of the subscriber life cycle: We, as customers, are creatures of habit so as businesses, it is important to understand purchasing and use behaviours of the past to determine what to sell next. Businesses need actionable insights into customers to gauge when to upsell and track early warning signs of churn. Once customers have made the fateful decision to cancel their subscription, it’s too late, but bringing together usage data, trend analysis and financial data offers a full life cycle view of your customers
3. No way of measuring subscriber relationships: In this new subscription economy, there are fresh financial imperatives around owning the relationship with the subscriber. This has resulted in a whole new class of metrics, and with it, a whole new slew of acronyms: ACV, ARR, COGS, G & A, GEI, to name a few. But ERPs were built to track products, invoicing and orders placed, not customer relationships. Making the shift to a subscription-based business model built purely on ERPs a disaster for finance departments.
4. No way to scale payments: There is not a one size fits all to payments and the channels available are exploding. Visa, Amex, Direct Debit are important, but they are part of the old guard. If your business is selling directly to consumers, your system needs to be able to accommodate all payment options and scale these as needed.
If you’re a media and entertainment or software company the need to monetise digital content or make the shift to subscription-based business models has come fast and hard. Disruption from smaller, nimbler competitors is creating both an opportunity and necessity for large enterprises to deliver new sources of value for customers by placing them at the centre. Established Australian companies like Fairfax Media have recognised that if they expect people to pay for content in an age of social media and online news aggregators, they need a full view of subscribers to deliver targeted, engaging content, and prove their value at every click.
For businesses in manufacturing, retail, utilities, and primary industries the call has been less urgent as their revenues have, up until now, still largely been tied to products and one-time shipments. But future growth is going to come from stickier customer relationships and new service lines such as connected machinery or home automation services that will be launched in the cloud. In the product economy, every order was considered a new sale. But in the subscription economy, sales revolve around an ongoing customer relationship and could be a new order or any change to an existing subscription, from upgrades to downgrades, renewals to cancellations. You need a system that can track all these changes, and then feed that information back into all your other systems.
With Australia and New Zealand’s annual subscription economy potential to increase to $2.62 billon* in the next four to five years, there’s never been a better time to take advantage of the subscription economy and break free from the shackles of old technology holding your business back.
For more, check out Zuora’s guide 5 Ways to Reinvent Your ERP!