Telcos may be good at recurring billing models, but subscriptions and software as a service are more sophisticated. Metanga, Zuora and others aim to educate.
These two companies and others have taken to YouTube to explain the terms that the industry must learn to get in tune with the language of the cloud. Watch Metanga’s ‘welcome to a cloud and SaaS moment’ or Zuora’s ‘two minute Tuesdays’ videos and you will learn about CAC and LTV, TCV, ACV, MRR and CMRR.
This may well cause weariness, cynicism or amusement, but the fact is that a subscription business is about much more than monthly billing. Experience from the retail world will once again come in useful for telcos as they get to grips with this new business model.
Even though telcos have been billing monthly since Burt Lancaster shouted ‘get me the Pentagon and be quick about it’ into the phone, they need to understand the sophistication of the model.
For many years the retail industry has understood the term lifetime value (LTV). Sears used to train staff to visualize $50,000 on each and every customer’s head as they walked into their stores, General Motors changed its business model when a consultant explained to them that every customer was worth $103,000 over his lifetime.
Telcos will be more familiar with terms such as total contract value (TCV) and annual contract value (ACV) but CAC may cause some confusion. Customer acquisition costs (CAC) may sound more familiar. According to Curt Raffi of Metanga, who presents their YouTube ‘a cloud and SaaS moment’, there are simple rules, although generalized ones, around customer acquisition costs – these should be between one third and 100 percent of the annual revenue per customer. Lifetime value should be at least three times the annual revenue. It seems telcos suffer from short life expectancies from their customers – figuratively speaking. Retail companies calculate much longer lifetime expectancies.
However, retail is now online and subscription billing models provide scope for innovation and a much greater focus on the customer. Analytics plus quality of service plus simple, clear subscriptions equals competitive edge. As more and more vendors move to subscription based offerings, from the cloud, the arguments for telcos to adopt them become compelling.
For many years telcos have been constrained by capex, particularly in uncertain economic times. Subscription billing models provide a tidy, opex based solution to this but are new to the telco world. While caution is advised and as long as subscription billing is not seen as a way of offloading problems onto someone else, then telcos should take a serious look.
Until the budget process moves away from a Pro-Capital approach, SaaS will not take-off within Wireless/Telco. Multi-year OpEx budgets are virtually non-existent and having large, multi-million net new OpEx to spend in a given year is also very uncommon…leading to more CapEx software deals.