It’s common to think of businesses existing in two very general categories: those that sell a product and those that sell a service. But as with so many other aspects of the corporate world, the rise of the internet and digital technology has rendered even this basic concept practically obsolete. Retailers can’t often expect to succeed on the strength of a stellar product alone – they are often expected to offer additional value through distribution or customer support after making a sale. The net effect of this new standard can be seen in the explosion of subscription services and sample box programs that customers now rely on for every imaginable need.
With so many businesses now operating in this hybrid service model, the old rules of financial reporting and accounting do not apply. That’s why organizations are increasingly arming themselves with the best people and technology to effectively track and understand these key metrics to continue driving progress and growth.
The state of the market
Whether it’s a simple web service like Netflix or a home delivery program like Blue Apron, consumers are now pouring more money than ever into businesses with a predominate recurring revenue model. According to data from Shorr Packaging, at least 2,000 different subscription box services were in operation as of March 2016, and the number has likely grown since. This includes programs from major retailers like WalMart as well as relative newcomers like Ipsy, Stitch Fix and Fabletics.
“New business models bring new headaches for retailers.”
While this market segment is now responsible for billions of dollars in sales per year, these businesses are also plagued by challenges new and old. On the one hand are problems that retailers have always faced, like inventory management and a market full of competition. But the subscription model has only compounded accounting headaches and the need to drive down costs related to customer retention and shipping. The Shorr study found that some 13 percent of subscription box companies could be expected to close within a year.
Common reporting challenges
A recent article from Business Insider went into detail on how these challenges may be observed in the public financial filings of the industry’s biggest players. Blue Apron, the subscription box service that made its initial public offering on June 29. As writer Nikhil Basu Trivedi explained, the company’s S-1 was hotly anticipated and was clearly written to highlight the company’s landmark achievements: more than $1 billion in sales and an implied customer lifetime value three times that of its customer acquisition cost.
These numbers looked great on paper, but savvy investors had reason to be skeptical. While LTV and CAC are both crucial metrics in modern corporate accounting, they go hand-in-hand with customer retention and churn, two concepts that the Blue Apron statement did not mention at all, according to Trivedi. Using outside data, he compared Blue Apron’s estimated customer retention to businesses with similar models, like Netflix and Dollar Shave Club. He found Blue Apron’s two-year retention to be vastly lower than other subscription services, but marginally better than Hello Fresh, a direct competitor in the food delivery market.
As more companies adopt subscription box programs, they are also finding new ways for analyzing financial performance.
“Blue Apron has clearly struck a chord with consumers, and many people love the service,” Trivedi wrote. “But they get tired of being subscribers, and the majority move on after a few months. The big question for its long-term performance is how Blue Apron will address this significant churn.”
Finding growth opportunities
It’s this kind of analysis that businesses cannot afford to miss out on. When known internal values can’t be compared to similar metrics from related business lines or the industry at large, insights that could revitalize growth become elusive. And it’s not enough to make only a single connection between two data points – this is a long and tedious process and requires days and weeks of work organizing records and crunching numbers.
But more business owners and executives are learning not to take this transactional work for granted. Consero is providing a new solution that equates to a paradigm shift in how accountants and finance teams collect and report on data. It’s one way in which organizations of all shapes and sizes are fighting new challenges with new solutions.
