(Stephen Parker, Head of Cloud Strategy, NewLease)
Margin is a key business metric, however in the cloud era the following 3 KPI’s challenge it for the throne:
- Customers perception of Time to value
- Delivering additional services at marginal cost
- Optimising the number of parties using the service
Do not misunderstand me I am not advocating a return to the .com model of grabbing eye balls and worrying about monetising it later. Also I am not suggesting that margin is not important, for long term viability it is a business basic.
What I am saying is that in the annuity world the speed with which value is realised and the ongoing value of a service (time to value) will determine the customers propensity to keep using and hence paying for the service. This is at least as important as the margin on the component parts of the service.
There is a (simplistic but true) statement that Profit = Revenue – Costs.
However there is a missing and equally simple extension to this:
Revenue = (periodic revenue) x (number of periods).
For most of the IT world over the past 10+ years this has in most situations been an unnecessary extension as the number of periods (transactions) was either 1 or the number of periods (transactions) was guaranteed in contract. Therefore the focus is on credit risk management to make sure that once the contract was signed the correct payment plan was in place thus ensuring that the customer paid the full amount (in advance, on invoice, payment plan, outsourced finance etc.). Put simply this is a Buyer Beware transaction. If the service does not live up to the buyers expectation then it is their responsibility to try and recover the money that is already in the sellers pocket.
In the cloud era the commitment from the buyer is to pay for what they actually use with pricing based on the assumption that there will be multiple periodic payments. Therefore the Revenue required to cover costs is not guaranteed at the point of the sales transaction. If the service does not deliver the value that the buyer is expecting, in a timely fashion (time to value) then they can leave and stop payments. The focus is now on churn management and ensuring sufficient value is delivered quickly enough to ensure the buyer stays with the service and keeps paying. We are now in a Seller Beware world. If a buyer leaves the service it is now the responsibility of the seller to try and recover any outstanding fees, the money has stayed in the buyers pocket.
I will not cover the additional dimensions to the Profit = Revenue – Costs equation further as they simple re-enforce my point. However in summary:
- The (costs) of adding additional services to the same customer should be non-linear if the infrastructure is provisioned effectively
- (number of periods) is not only a function of time, but also the number of parties involved in the Revenue recovery
As a business owner which would you prefer:
- A high margin service that sells quickly but also has a high churn rate, leading to poor reputation and diminishing sales
- A lower margin service that sells as quickly, but has quick time to value and long term usage, with a growing customer base and marginal costs to offer additional high value services?