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Subscription Business Model Metrics: A Systems Check
Clothing retailer Bloomingdale’s recently launched a fashion-rental-subscription service, just one example of the growing trend towards “subscription” businesses. When executed successfully, the appeal of subscription revenue is apparent – recurring revenue, increased customer lifetime value (LTV), and reduced customer churn. However, because subscription business model metrics aren’t always planned from the outset, this business model can create blind spots for management.
There are many things to consider when launching a subscription business, from branding and marketing to pricing and customer experience. But for this article, we will focus on the less glamorous topic – systems. Specifically, management will require visibility on four key items to manage any growing subscription business, so ensure your internal systems can capture and publish these critical data points.
Customer Acquisition
Where do your customers come from and how much did it cost to acquire them?
Attribution – where your customers came from – is a simple enough question, but it can become terribly complex as a business grows. In the early stages, there might only be a handful of referring partners or channels, but over time, the question of attribution becomes exponentially complex. Do you have a system in place that captures customer information (at the individual customer level)? Is there a consistent logic behind the naming conventions and fields captured?
Cost of Acquisition
What did any given customer “cost” you to acquire? Like attribution, cost of acquisition can be fairly simple at the outset when marketing dollars are focused on only a select number of channels. But like acquisition, it is important to have the right system in place to capture acquisition costs and, again, to establish from the outset the logic and structure of the data. Having the ability to segment acquisition expenses, at the campaign level, and track this intelligently throughout the acquisition funnel, is paramount to having high-quality cost of acquisition data.
Customer Lifetime Value
Whether your company is interested in revenue, margin or both, establishing how much customers (by segment) are worth to your business is a critical piece of information that will drive marketing spend, product development, and customer retention efforts.
Like so many of the variables in a subscription company, the customer lifetime value metric begins to get convoluted very quickly as the customer base becomes increasingly fragmented. As the number of acquisition sources increase, and the number of campaigns increase, a need will develop for integrated, well organized systems to create a “real” LTV metric. A moment will arise where you’ll want to compare the lifetime value of a customer acquired via Partner A during campaign 6 against a customer acquired via Partner Z during campaign 22, for example. Being aware of long-term complexities at the onset can help you avoid surprises down the road.
Reconciling and Reporting
You’ve set up the systems to capture the subscription model business metrics you need and are paying close attention to make sure that your data is set up to “play nice” together. Now you need to have the ability to actually bring all these data points together and get the information into the hands of the people who need it!
The tool can be anything from PowerBI to Tableau, to a module of a larger tool like NetSuite or Oracle Cloud – the bottom line is that you will need to establish a central repository that stores and streamlines the data from all of your various systems.
Establishing a ‘one source of truth’ is critical to ensure that everyone in the organization has access to the same, accurate, trusted information. Resolving naming convention discrepancy and ‘cleaning’ data appropriately is done here, to make the end-user experience (e.g., accessing reports) as frictionless as possible.
Finally, the outputs. In my experience, the outputs (e.g., reports, self-service data) are the easiest part of the data process, so long as you’ve done a proper job in structuring the underlying data. Far too many companies want to simply swap out their visualization tool hoping for enhanced reporting, when the problem is actually the underlying data.
Keep Improving: More on Subscription Model Business Metrics
No company I’ve encountered does all of these things perfectly. But the best ones define the ideal state of their internal systems and consistently strive towards that goal. For many companies, a useful first step is to start with the end in mind – the ideal data they want at their fingertips. From there, create a map that details how and where this data will be captured, how that data should be structured, how data from a variety of systems or modules will be centralized and ultimately, how the information is going to accessible to the end-users who need it.
To learn more about how we can help your company select, implement or optimize your systems, visit our financial systems page.
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Retail Marketing KPIs & Other Retail Finance Performance Strategies
As the success of online retailers skyrockets and online shopping continues its rise in popularity, brick-and-mortar retailers have seen a significant decline in business. While most subscription-based and online businesses have a strong digital marketing team and marketing plan in place, many brick-and-mortar shops are lagging in their knowledge of retail marketing KPIs and strategies.
The focus in budgetary planning differs for a brick-and-mortar shop in comparison to an online retailer. While a brick-and-mortar retailer’s first concern when preparing for a store launch is the revenue forecast, an online retailer is more focused on the Lifetime Value of Customer (LTV), which is arguably the most important revenue KPI in online shopping. Differences between the two retail styles continue to emerge when you look at where they spend their money. A brick-and-mortar retailer’s major spend is generally the fixed cost of rent, while an online retailer’s major spend is the more variable customer acquisition cost (CAC).
As they continue to fall behind, brick-and-mortar retailers have begun exploring strategies to keep up with their online counterparts. Wholesalers have also entered the game, parlaying their new access to the online customer into direct-to-consumer platforms. But they, too, are often lacking formal digital marketing departments.
Brick-and-mortar stores and wholesalers that lack the digital strategies and departments of their savvy online competitors can leverage the finance team to provide major assistance with metrics and strategies.
With the strategies listed below, the finance team can aid merchandisers, product managers and/or digital marketing vendors to boost profitability.
1. LTV Determination
Lifetime Value of Customer is one of the most critical metrics in the online world. It calculates the amount of revenue that comes from a customer over the life of the business relationship and is a vitally important KPI of overall revenue. The LTV is calculated by multiplying the average order value (AOV) by the purchase frequency (PF) where AOV is the total sales divided by the total order count and PF is the total orders divided by the total number of customers:
- LTV = AOV * PF
- AOV = Total Sales / Total Order Count
- PF = Total Orders / Total Customers
Consider the following example: A customer visiting the cash register orders $50 of merchandise at each visit (AOV = $50). They purchase twice a year (PF = 2). The LTV would be 50 * 2 = $100.
Once obtained, the LTV essentially places a value on each customer. If desired, deeper analysis of LTVs can be done based on cohort trends, past purchase behavior or other subcategories.
Learn More About KPIs in These Posts:
2. CAC Spend
Another important metric that works in tandem with LTV is the customer acquisition cost. While LTV calculates the long-term value of an average customer, CAC calculates the average cost to acquire a new customer.
The difference between LTV and CAC is the margin the company generates per customer. One would hope that the CAC is always lower than LTV. A good rule of thumb for CAC forecast is 1/3 of LTV, but this will vary by industry.
While brick-and-mortar stores have a fixed cost in their rent, the online retailer’s CAC is variable and can be increased by spending more or decreased by spending less. This presents an opportunity to control costs and improve margins.
A few strategies for reducing CAC spend are:
- Fine-tuning the target market – Creating a more specific ad can improve the conversion and lower the cost
- Segmented email marketing instead of sending mass emails
- Utilize longer-tail pay-per-click (PPC) ads – the more specific and long tail the search words, the higher the conversion and lower the cost
- Leverage the existing user-base by boosting referral rewards
- Another feature of CAC is that it’s not limited to a specific geographic location like a brick-and-mortar
3. Product Margin
Just as a retail store would place higher-margin products in the most visible shelf space, digital marketers should place their higher-margin goods at the top of the product page. Knowing the margin for each product is a critical piece of information that can help the company make informed decisions on product placement. The finance and merchandising teams can work together to identify those products with the best margins and channel the traffic towards those items. Custom product landing pages can be designed for these higher-margin products and customers can be funneled there from tailored ad spends. The immediate benefit of this strategy is to drive profitability and lower the CAC.
4. Invest in Training
Whether working with vendors or an in-house digital marketing team, as the ultimate budget owners, finance teams should have a deep understanding of digital marketing. Taking courses in digital marketing can be a worthwhile investment for finance teams particularly as digital marketing relies heavily on margin analysis, mathematical calculations and KPIs. A strong argument can be made that the FP&A skillset is better equipped to utilize the data that drives digital marketing than traditional brand marketers. Allocating a small portion of the FP&A training budget in this area is likely to yield positive results.
5. Align on Budget
Whether the finance team has an active or passive role in deriving KPIs to support a company’s digital marketing efforts, the FP&A team will benefit from understanding LTV, CAC and other related metrics. As the primary users of operating expense budgets, the FP&A team should ensure that the inputs that drive LTV and CAC ratios are correctly reflected in budgets and forecasts. Correctly incorporating this information is one more lever toward higher profitability.
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About the Author
Jackson brings 15 years of finance and systems experience in apparel, entertainment, and technology. Prior to 8020 he has served in various leadership roles in the apparel industry: VP of Finance at PPLA Clothing, VP of Finance at Little Giraffe, and the head of FP&A at Junk Food Clothing. At Fox Entertainment, Jackson led the implementation of business intelligence tools and reporting, and at Fox Sports, he conducted analysis on multi-billion dollar sports deals. Jackson’s experience also includes financial modeling for technology startups as well as large public-sized tech companies. Jackson holds a Bachelor’s from USC’s Marshall School of Business with a concentration in finance.
5 Keys for Your Customer Lifetime Value Model
As more companies move from single-transaction to recurring-revenue relationships with customers, estimating and tracking customer lifetime value (CLV) with care is critical for every business model. While CLV is not an exact fit within annual income statements, it is a useful financial modeling tactic for marketing ROI and potentially valuation. We believe there are 5 key considerations when building a customer lifetime value model for a business.
Installed Base / Adoption as a Key Revenue / Cash Flow Driver
Penetration of the addressable market should be captured to quantify the number of expected customers/users. This could come through as one or a combination of drivers such as:
- Market Share Gains – gradually increasing proportion of the existing specific market, such as share of wallet for mobile soccer game revenue or percentage of units of robot vacuums
- Adoption Rates – for fairly new products/solutions where an existing market is not yet present, an increasing percentage of the population (e.g., select demographics) or companies (e.g., small/mid-size corporations) can be utilized
- Installed Base / Attach Rates – for products/solutions that are similar to razorblade business models with associated consumable or follow on purchases, assumptions on building a cumulative installed base and assumed attachment rates can be used to drive revenue estimates.
Pricing / Revenue Per User Trend
Once the customers/users have been quantified, pricing or revenue per user assumptions should be identified. This factor should mostly match up with the customer/user driver even though other streams (e.g., advertising revenue) may apply. Examples include:
- Monthly/Average Revenue Per User (ARPU) – useful for subscription businesses that collect monthly membership fees from users. Different assumptions for different tiers be used as much as possible. For out years, increases or decreases in prices for each tier should be considered.
- Average Sales Price – useful for hardware businesses where unit volumes are being sold. This assumption should reflect revenue net of channel margins and discounts if applicable. Similar to user tiers, different product lines should be reflected, and hardware price erosion (even for successor models) should be considered.
Churn / Useful Life
For active-user-related business models, attrition of the user base is a key forward-looking assumption. Great care should be taken with these drivers as they can swing estimates both up and down with just a minor swing.
- Monthly Churn – percentage of cumulative users that are no longer active in the current month. In wireless telecom businesses for example, about 2-4% of the total subscriber base stops being active every month which could similarly apply to certain mobile applications
- Useful Life – use of the initial component that drives follow-on purchases ceases at some point. For printers for example, this could be range 2-10 years depending on the hardware type. For mobile applications this could be a much shorter 90 days or less before a user is deemed to be non-active based on specific criteria (e.g., minutes of use, etc.).
Costs
In addition to costs of goods sold (if applicable), cost to serve and cost to acquire/install should be reflected as completely as possible. Some examples of the latter can include the following:
- Network/Data Costs – estimated cost to provide a service or solution, which can include data/bandwidth costs, storage costs, development costs, etc.
- Sales and Marketing Costs – estimated costs to obtain customers/users, such as advertising costs, sales team compensation, etc.
- Other Costs to Acquire – in razorblade or freemium business models, this can translate into the net loss of the initial component sold or free software provided to the customer that will generate consumables/add-ons in the future
Create Scenarios
Since there will always be variance in assumptions to estimates made, ranges of confidence should be created. At least 3 should be created at least modifying key drivers such as users, churn, and pricing such as:
- Conservative – considers a situation where there is a challenging macroeconomic environment and competitive landscape which impact sales volumes and pricing.
- Base – reflects the steady state that the business expects if economic and competitive environments are stable.
- Aggressive – should correspond to a beneficial situation where macroeconomic factors are very beneficial, and the competitive position of the business is strong such that sales volumes are strong and/or pricing is at the high end of the expected range.
Using CLV in Practice
Factors #1 – #3 can be used for a simple customer lifetime value such as:
CLV = Monthly ARPU / Churn Rate
For example, a business that generates $30 of monthly ARPU with a 5% churn rate would have a customer lifetime value of $600. As stated in #3, changing the churn rate would move the CLV a lot.
This could then be compared to the customer acquisition cost (CAC), which is calculated by:
CAC = (Sales & Marketing Costs + Other Indirect Customer Acquisition Expense) / Number of Customers Acquired
In a case where 1 million customers were acquired via sales & marketing costs of $500 million, the CAC is $500. This compares favorably to the CLV.
Incorporating more of factor #4 and #5 (scenarios), a long-term financial model can be built. In addition to the above 5 factors, other considerations such as time value, operational (retention) & overhead costs, seasonality, etc. may apply.
Again, CLV is not a GAAP measure, but it helps to add a longer-term perspective to short-term budgets/forecasts that have a near-term focus. The long-term estimations can also be used for a discounted free cash flow (DCF) business valuations.
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About the Author
Marco has 17 years of Finance and Consulting experience. His work spans various industries including technology, entertainment, telecommunications, consumer products, financial services, and healthcare. Marco has expertise in Financial Planning & Analysis (budgeting, forecasting, and reporting), Strategic Planning, project management, financial modeling, merger integration, and valuation. Prior to joining 8020 Consulting, Marco held Finance and Strategy positions at Epson America and also worked for various firms including Deloitte Consulting, Paramount Pictures, Grupo Modelo, Cricket Communications, UBS, and Goldman Sachs. Marco holds a B.A. in Economics from Brandeis University, and an MBA from the UCLA Anderson School of Management.
Notes from the Field: Leading a Customer Profitability Initiative for a F1000 Company
An annual customer profitability analysis is a crucially important process for organizations to undertake. To put it simply, this process offers the opportunity to determine which customers are making your business money and which ones are not. It shows which customers have underserved opportunity to grow and which ones are a time drain for sales, marketing and finance teams.
I recently led a customer profitability initiative within a Fortune 1000 company with a multitude of product offerings. Based on my experience, there are three main areas to address:
- Establishing a set of quantitative KPIs across appropriate departments
- Identifying qualitative issues regarding servicing the customer
- Evaluating product mix profitability with the customers
Establishing Quantitative KPIs
Establishing key performance metrics is critical to customer profitability analysis. Large companies tend to undergo a lot of structural changes (e.g., system changes, team responsibility restructuring, customers acquiring other customers), so the key to analyzing these metrics is making sure the metrics are consistent year over year. This makes performance an apples-to-apples comparison, which is important as it will likely involve collecting data points across multiple departments.
Finance groups should be well versed on the overarching issues in other departments to get the full picture for the customer analysis. This is particularly important on the operational side. Most quantitative customer analysis tends to focus on gross margin aspects such as revenue and marketing/sales spend. While these are obviously extremely important, it is equally important to incorporate the full cost of the customer on the operations team.
Find out the number of employees and the number of hours it takes to service the customer effectively. What are their setup costs? What are shipping costs, if applicable? It is imperative to get quantitative data on all areas in which the customer interacts with the company to get a full picture of the customer profit margin.
Qualitative KPIs
While the focus on quantitative margin metrics is obviously warranted, it is also equally important to look at what qualitative aspects of the customer relationship affect profitability as well. Some customers are higher maintenance in ways that are more difficult to quantify, yet they still affect the bandwidth of your employees to drive revenue at other clients across the portfolio.
Some questions to ask to determine these metrics are:
- How often does the client email sales with questions/comments that are unnecessary?
- How difficult is the customer to please?
- How close is the overall relationship with the customer in general? Is it adversarial?
Difficult clients cannot only cost you time that you can be spending driving revenue at other customers, but also take a toll on employees. If working closely with difficult customers drives employees to leave your organization, that’s another indirect cost. Analyzing these factors can help your organization reduce exposure to the drawbacks associated with this type of customer and help optimize time with other customers.
In one case, I witnessed an organization dramatically cut the time spent with a very high maintenance, but large, customer. The hours and effort redirected by employees to other accounts resulted in a total revenue increase that covered the loss in revenue from the high maintenance account, plus drove an additional 15%.
This type of analysis can make a substantive difference in optimizing personnel to increase profit margin. While certain accounts that have a large profit share may also be high maintenance, the exercise can help increase the profit share of other accounts and help lower their power and influence over your organization.
Product Mix Analysis
For larger organizations that offer multiple products and brands to sell to a customer, targeting the correct mix of products to sell them is also key to customer profitability analysis.
To do this effectively, it’s a two-step process. First, you must obtain metrics on and rank the overall profitability of products/brands in the overall company portfolio. Second, you must evaluate each customer’s usage of these products and where they index on usage opposed to overall customer base.
This effort can help determine if a particular customer’s higher utilization of less profitable products/services causes the customer’s overall profitability to suffer. Then your organization can recalibrate the types of products or services on which marketing/sales focuses their efforts with that customer to increase profitability. This can also help your organization better optimize marketing or sales spend on a particular customer. If a customer has to use a particular product or service that has low margins more than other customers do, then as a counter, you can set a tighter budget on marketing spend on that customer to compensate and drive profit margins upward.
Analyzing customer profitability is a critical process that organizations can use to optimize their personnel and budget to achieve the best profit margins possible. With a deep-dive analysis into consistent and established quantitative KPIs, an evaluation of qualitative customer KPIs and analysis of product mix offered, organizations can effectively set the course for faster growth and higher profit.
Bringing in Customer Profitability Experts
If you’re looking for help with profitability, or if you’re thinking about bringing in financial consultants, then we invite you to contact us at 8020 Consulting! We offer outside expertise with industry best practices and would be happy to help you define your needs and offer advice on next steps.
We also offer more insight into financial planning & analysis in our free forecasting process ebook. To download it, click the button below:
About the Author
Justin comes from a diverse background of Sales Operations Finance, FP&A, Strategic Finance, and business analytics within the Media, Entertainment and Consumer Products industries. Prior to joining 8020 Consulting, Justin served as a Sales Finance Analyst for Mattel, the world’s largest toy manufacturer. He also worked in FP&A in with various other Fortune 500 Companies such as Warner Bros and Time Warner Cable. His specialties include financial modeling, budgeting and forecasting, data analytics and strategic finance. He attended the University of Michigan, Ann Arbor, where he received his Bachelor’s Degree in Political Science. He later received his MBA from the University of Southern California with a focus on Corporate Finance and Valuation.
Optimizing Your Price Increase Strategy
Price increases are a fairly controllable tactic for Finance teams looking to improve profitability. Ultimately, price increase strategy can come in several forms (e.g., adjusting rebates or cost to serve) and may only apply to select customers.
After collaborating with leadership, sales, and marketing teams to select the specific product/solution(s) for which to raise pricing, several factors should first be considered before planning to implement.
Initial Considerations for Price Increases
At the onset of exploring price increases, a Finance team should consider:
Macro/Competitive Conditions
The macroeconomic and competitive landscape should be stable if a price increase is being proposed. If macroeconomic conditions are challenging or competitors are noticeably cutting pricing on competitive solutions or products, the timing may not be best for a price increase unless the solution or product in question is deemed to be insulated by its premium or unique positioning.
Gauging Elasticity
If possible, market research should be engaged early on to ascertain what the elasticity implications are from proposed price increases against both static and dynamic competitive scenarios. A beneficial result (i.e., expected higher revenues and profit) across most potential outcomes can help build internal support/buy-in for the price increase strategy.
Special Channel/Customer Considerations
Unless the business in question is direct-to-consumer, certain channels and customers may have leverage to push back on proposed (end-user) price increases. While all channels will likely be wary of potentially lower sell-through from price increases, some may be successful or justified in stressing their strategic position (i.e., % of sell-through, exclusivity, etc.).
Learn more in these related posts:
Price Increase Strategy Implementation Recommendations
Once the above considerations are addressed, the following steps are recommended for implementation of price increases:
Data Mining
Collect and break down available net pricing data to see what controllable sales and marketing tools by specific customer can be affecting net pricing by unit that flows through to revenue such as:
- Customer/Channel Mix – proportion of transactions by customer and channel type
- Geographic Location – proportion of transactions for specific geographies or delivery routes
- Product Mix/Assortment – Mix of product portfolio offered by a specific customer
- Channel Margins – markup to end-user price that is offered
- Rebate Levels – reduction to end-user prices
- Co-op Marketing – spend to advertise product/solution within a specific customer
- Bonus Product/Samples – value of free or trial products
- Marketing Collateral – Branded materials provided to customer to promote awareness
- Shipping/Handling or Freight Fees – Expenses related to delivering product
Address Low-Hanging Fruit
After reviewing the data and grouping net pricing by dimensions such as customer, channel type, and geography, easier opportunities to adjust sales and marketing tools should present themselves, such as:
- Small or non-strategic customers receiving unjustified levels of channel margin, rebates, co-op marketing, or marketing collateral
- Geographic price discrepancies which can be leveled if not justified by known market realities
- Customers/channels that receive higher levels of support from these sales tools should be justified by factors such as profitability or market share
Those situations not meeting justifiable criteria should have their support levels adjusted (i.e., lower rebates). After addressing these more straightforward issues, efforts should continue in areas that require more coordinated tasks.
Optimize Product Mix (If Multiple Products/Solutions)
If analyzed properly, the transaction data can illustrate what the optimal product mix by customer type or geography can be. It should be understood that all customers won’t purchase the most profitable product/solution mix. With that said, working with your sales team, opportunities should exist to improve the profitability of the product mix which works with market realities. Pushback from both the sales team and customer is possible, as resistance to change is common, but a collaborative approach should yield incremental profitability.
Optimize Customer/Channel Mix Based on Cost-to-Serve
While putting a product or solution on all physical or virtual shelves seems like the best way to capture all potential sales opportunities, analysis of transaction data can shed some additional light. Some customers and channels can have high costs-to-serve that ultimately make them less profitable. Factors such as high expedited shipping instances, return volumes, co-op marketing needs, or specialized packaging are examples of cost-to-serve components that may not be justifiable for all customers. The sales team should be informed of what appropriate levels of costs-to-serve are based on data insights.
Optimize Sales & Marketing Tools Utilized With Customers/Channels
While sales teams have all the aforementioned tools available to offer customers to drive sales, not all tools have to be made available to all customers. Analyzing the data properly should allow Finance, Sales, and Marketing teams to see, for example, that a certain channel type like e-commerce is more profitable with higher levels of rebates, but not co-op marketing. Not all situations can be changed but some changes should provide incremental profitability.
Adjusting Sales Team Incentives
The sales team is a key stakeholder in price increase implementation. In order for them to be motivated to implement these changes with customers and channels, their incentives, such as commissions and compensation, should be adjusted to related to the product and channel mix changes. If approved by leadership, consultation with Human Resources to effect this change correctly is needed.
Bringing in Pricing Experts
If you’re looking for help with pricing optimization, or if you’re thinking about bringing in financial consultants, then contact us at 8020 Consulting! We offer outside expertise with industry best practices and would be happy to help you define your needs and offer advice on next steps.
For more insight into this financial planning & analysis discipline, you can download our related infographic. It offers a clean and printable format that makes it a handy resource as you explore and implement price changes:
About the Author
Marco has more than 17 years of Finance and Consulting experience. His work spans various industries including technology, entertainment, telecommunications, consumer products, financial services, and healthcare. Marco has expertise in Financial Planning & Analysis (budgeting, forecasting, and reporting), Strategic Planning, project management, financial modeling, merger integration and valuation. Prior to joining 8020 Consulting, Marco held Finance and Strategy positions at Epson America and also worked for various firms including Deloitte Consulting, Paramount Pictures, Grupo Modelo, Cricket Communications, UBS, and Goldman Sachs. Marco holds a B.A. in Economics from Brandeis University, and an MBA from the UCLA Anderson School of Management.
Oracle Planning and Budgeting Cloud: Benefits of the First Hyperion EPM Product
Oracle Planning and Budgeting Cloud Service (PBCS) is a subscription-based planning and budgeting solution built for and deployed on Oracle Cloud. An application of Oracle’s Enterprise Performance Management (EPM) suite and based on Hyperion Planning, PBCS has enabled organizations of various sizes to quickly adopt world-class planning and budgeting applications with no CAPEX infrastructure investments. It offers immediate value and greater productivity for business planners, analysts, modelers, and decision-makers across all lines of business within an enterprise. PBCS is designed to scale and perform with flexible and customizable deployment options and virtually no learning curve.
Key Features of PBCS
Oracle PBCS provides freedom of choice to deploy a solution that meets specific needs. Clients can either leverage the out-of-the-box, best-in-class planning frameworks or build a focused customized solution that is tailored to an explicit use case. The best practice planning modules are designed to be up and running with minimal effort and are easy to maintain as business planning needs evolve. The modules can also be used by both finance and operational planners and either deployed in their entirety or combined with existing processes to quickly deliver value to the planning process.
Some key features of the modules within PBCS are as follows:
- Financials – Fully integrated financial statement planning across the Income Statement, Balance Sheet, and Statement of Cash Flows.
- Strategy – Create long-range forecast models using built-in sophisticated scenario modeling capabilities. Perform side-by-side financial and operational analysis of numerous business scenarios and easily change assumptions. Utilized by both Corporate Finance, as well as users in the business units.
- Workforce – Address planning needs related to employees across the enterprise. Easily plan for compensation spend by employee and integrate with Human Capital Management (HCM) systems for a complete solution to manage employee budgets, skills and talent.
- Projects – Financial planning for project-oriented industries and departments (e.g. IT, Marketing, R&D, etc.). Allows for granular planning of employees, contractors, materials, and costs associated with large scale projects.
- Capital – Address planning needs associated with new and existing assets, as well as intangibles. Accounts for long-range, asset-related impacts across the Income Statement, Balance Sheet, and Statement of Cash Flows. Appropriate for enterprises that have significant capital assets.
Benefits of PBCS
Oracle PBCS is one of the most robust, cloud-based planning and budgeting solutions on the market. It has been used by many large, medium and small companies worldwide to solve enterprise-wide business planning use cases. There are several benefits of implementing PBCS:
- Integrated Planning and Budgeting Process – Planning and budgeting in most organizations tends to collaborate typically using spreadsheets being exchanged between and within operations, lines of business, and finance teams. PBCS facilitates the enterprise- and departmental-level planning process by providing both Excel-based and web-based modeling, planning and approval capabilities within a collaborative scalable solution. Sales, operational and strategic plans can be linked to long-term and near-term financial plans.
- Robust Modeling and Predictive Analytics – Companies today are faced with a rapidly changing business environment. Demand is volatile, costs fluctuate, and the supplier landscape is constantly changing. A key requirement to stay ahead of the competition is to understand the volatility and model for these financial and operational changes quickly based on fast changing assumptions. PBCS provides sophisticated modeling and predictive analytical capabilities that allow users to create multiple what-if versions and slice and dice data based on various assumptions.
- Microsoft Office Integration – PBCS offers comprehensive integration with Microsoft tools such as Excel, Word and PowerPoint using capabilities of Smart View for Office add-in. Users can use Excel as their modeling environment and slice and dice data using Excel based ad hoc analysis. Common planning actions, such as spreading and allocation, are available within data grids. Additionally, users can directly integrate data from PBCS into Word and PowerPoint to create reports. This allows the creation of highly customized documents and presentations with accurate information and users can automatically refresh the report when the underlying data changes. The end result is reduced manual intervention, improved data integrity and increased reporting accuracy.
- Seamless Planning and Management Reporting – Reports and dashboards that display plan, forecast and actual data can be created quickly, and any changes made to the plans in PBCS are instantaneously reflected in the content of the reports and dashboards. Using the web interface, users can access dashboards, interactive analytics and richly formatted financial reports while interacting with the planning system.
- Low Cost and Quick Implementation – Since PBCS is maintained in the Cloud, data centers or cloud servers where PBCS is hosted are owned by Oracle. This eliminates the need for any CAPEX infrastructure investments. Additionally, software versions are always up to date and maintained by Oracle, allowing clients access to the latest and greatest version without requiring any downtime to upgrade. As PBCS removes infrastructure barriers and doesn’t require any onsite hardware or software, businesses of any size can quickly implement the planning and budgeting solution.
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5 Things to Consider When Deploying Sales Performance Management Software
Companies with high-growth trajectories and those that reach a modicum of complexity with their incentive plans will want to invest in a robust Sales Performance Management (SPM) software system. Those organizations that are poised for sales force expansion will want not only a system capable of calculating commissions and incentive plans but also automating them. Once a company reaches a threshold of complexity or volume of incentive based employees they will find its more efficient and economical to deploy a specialized software system rather than hire more full time employees to handle the monthly calculation work. The work includes month end close, reporting, statements for payees, payroll, but also a significant amount of time on dispute resolution. What was once a one-person job quickly turns into a department frustrated with the inability to streamline the process and provide superior customer service to the sales force.
Once executives have visibility into the problem of monthly commissions management, it is often too late for an internal resolution.
The solution is now a third-party software platform that brings new complexities, is a drain on resources, and usually comes with an unexpected price tag. So how should management decide on a course of action? Below is a list of items for consideration:
Complexity
Third-party software is not needed if a company can successfully manage calculation of commissions on its own when the incentive plans utilize minimal variables and have a limited work force on commissions. If, however, your Excel spreadsheets are starting to look unmanageable and require two people to maintain, it may be time to invest in another solution. Typically, 100 payees or 25 variable plans signal the need to start looking for help. If you have multiple currencies, international payrolls, splits and revenue recognition considerations a third-party solution is probably needed. (You can read more about keeping it simple in our sales compensation plan design tip sheet.)
Dispute Resolution
Your sales force is getting larger and demanding more personal attention. Complexity in sales plans lead to more opportunities for calculation errors which leads to disputes from your payees. Disputes take time and require tracking, approvals from management, communication with accounting and payroll. When you have more than 100 payees, calls, emails, texts and Slack messages multiply for your commissions specialist and never yield. A scalable platform that allows for not only tracking of this communication but automation of self-service resolution is required.
Audit
High-growth companies with financial backing as well as medium-sized companies with banking relationships require consistent audited financials. Keeping track of commissions, bonuses, one time payments, and spiffs while maintaining strict financial controls and following revenue recognition rules can be daunting. Public companies face even more scrutiny. A sales performance management system can provide ASC 606, capitalization and amortization support, and integration with the ERP solution.
Transparency
Depending on the company culture, management may want to provide minimal, partial or complete transparency about commission calculations and amounts to their sales force. A nimble and user-friendly system allows the resident commissions admin to provide variable degrees of transparency to executives, account managers, admins and payees. Transparency drives better understanding of the commission process, lowers dispute needs, and motivates the workforce through leaderboards, gamification and visibility into accurate bonus estimation.
Selection
Once your organization determines that a Sales Performance Management software is appropriate, selecting one may seem complicated as well. Vendors that specialize in Sales Performance Management solutions can range from simple off the shelf software to more sophisticated solutions that require a deep understanding of finance, accounting, IT, and require significant project management and implementation leadership. A good place to start is with the annual Gartner Magic Quadrant report on SPMs. This report tracks the leaders (Callidus Cloud, Xactly, Anaplan) and new entrants (Iconixx) in the segment. Next, schedule demos with the vendors that fit your industry, budget, and implementation timeline. Finally, try to speak with companies that already have deployed the vendor solution you are considering to understand the efficacy of the solution, total costs, and customer service levels post implementation.
A Note About Sales Performance Management Software Implementation
Sales Performance Management is a necessity for growing successful companies that have a significant sales force with complex incentive plans.
And implementing the chosen SPM solution is as important as the selection process.
Remember that a 1% error rate could mean thousands if not hundreds of thousands in losses per year. Making an investment to get your sales compensation planning right from the start will more than pay for itself over the long run. It will also put less strain on your internal resources and drive adoption among the sales force. Companies should no longer settle for calculation and automation of incentive pay, but aim for optimization to drive forecasting and better financial management.
For more information on selection and implementation expertise, contact us or view our financial system consulting services page:
About the Author
Matt Kim-Perek has more than 20 years of finance and accounting experience across entertainment, business services, telecom and high-tech industries in both private and public companies. As a consultant, Matt has managed strategic projects, advised on M&A transactions, provided pre/post IPO services, created budgeting and forecasting models and performed system implementations, including Anaplan. Prior to 8020 Consulting, Matt worked at CSG International, Anthem, and Imperial Capital, where he provided buy-side and sell-side investment banking services to private equity clients. Most recently, Matt served as Interim CFO at GeoLinks, a high-growth wireless tech company. Matt completed his undergraduate work at UCLA and earned his MBA from USC Marshall School of Business.
Common Mistakes When Creating a Film Ultimate
Creating a Film Ultimate has become a common exercise for studios as they look to estimate the total revenues from a film to justify the large production costs of making a movie. Although studios have been creating Ultimates for years, several common mistakes often take place during the Ultimates process. Some of these mistakes are resource related, some are due to poor planning and some center on mitigating outside influences. In the following article, let’s expand our exploration into Film Ultimates by discussing mistake-prone areas of Film Ultimates.
Inaccurate Participations Calculations
Participations are clearly an important aspect of the cost of movie Ultimates, yet an area that tends to lead to a lot of mistakes. Participation contracts have become increasingly more complex over the years as movie talent works to extract as much value from their likeness as possible. At the same time, new avenues of revenue are being used by studios to recoup their costs. Solid working relationships between legal, finance and accounting are paramount in ensuring contracts are read, understood and translated properly into forecasting systems.
Having a specialized finance professional is key in making sure that participations are calculated accurately throughout the process and any rate triggers are captured. They should understand contracts and be comfortable digging into the details, while bringing the financial acumen and creativity to build that understanding into your financial system or Excel model.
Lack of an Enterprise Resource Planning (ERP) System
The importance of an ERP system is something that is recognized in corporations, as they need to combine actuals and forecast into a flexible, single tool that can be used by several different departments. Many forecasting solutions now offer some type of Ultimates building process that can be purchased as an add-on, or they may offer a custom build depending on your budget.
However, having seen ultimate spreadsheets with 25-30 tabs that link to other sets of Excel templates, the chances of “fat finger” mistakes aren’t something you should have to worry about. Having a finance professional who has experience in ERP systems is critical when building a new Ultimates solution. (We’ve covered common ERP implementation mistakes and offered insight into selecting ERP solutions previously.)
Misaligned Licensing Revenues
Licensing revenue has become a staple in creating a Film Ultimate, as studios have unlocked the long-term earning potential that consumer products, games, and even theme park entertainment can offer a studio, all without the burden of production costs or inventory risk. Simply receiving a minimum guarantee based on royalties earned has added to both revenues and operating income for studios.
Studios need to be aware of the latest market trends when factoring in licensing revenues. For example, as toy play patterns continue to evolve or as gaming changes from console-based games to mobile- and free-premium-based gaming, studios need to be more connected to consumer purchasing behavior to determine projected revenues. Further, with the changing retail landscape, big box retailers are shifting shelf space up/down on a frequent basis and have moved away from license merchandise in apparel in favor of in-house brands. It is important that your finance team has built enough of a relationship with sales and category managers to understand the changing environment and be savvy enough to build those potential trends into the Ultimates process.
Learn more about best practices for competitive studios in our ebook:
Comparative Analysis that Lacks Consistency
The Ultimates Process may also lack proper comparative analysis when determining the potential revenue for a title, comparing the new title to titles that share similar features or by comparing the previous version of the title when it’s a sequel or further iteration of a movie series. Usually this mistake can come in either of two situations.
One vulnerability occurs when the film has a different release timing than the comparable title, and the studio fails to do enough analysis to truly consider variables such as seasonality, or additional bumps from proximity to holidays (e.g., Easter Sunday, Christmas or Thanksgiving Break, or Summer Blockbuster season).
Secondly, studios may assume sequels will produce the same level of revenues without taking a step back to examine the total makeup of the film. Have audiences really clamored for a second installment of your film? (Planes 2, anyone?) Or, is the market already flooded with merchandise from the original film? (Cars 3 merchandise was difficult to sell as Cars and Cars 2 merchandise had become staples in the marketplace.)
Inaccurately Factoring Title Performance in the International Market
With significant revenue (sometimes well above 50 percent) coming from distribution outside of a film’s home country, it is vital that film companies understand all the international components and how to properly structure an ultimate model. A common oversight in perfecting a Film Ultimates model that utilizes future film revenue from the international market is failing to consider the release windows of a film in the International Free TV, Pay TV, SVOD and Home Entertainment spaces. Each release window of the film requires its own unique financial model that takes into consideration the nuances of those international markets within those windows, which is vital to fully monetize the film product.
Not Factoring in Future Currency Movement
Another common oversight when creating a film Ultimates model is not taking into consideration the proper exchange rates involved when international revenue is being forecasted in a particular window that may occur two or three years out. By properly developing currency exchange rate models within the Ultimates, a studio can make informed decisions to help minimize risks and maximize returns.
Change in the Home Entertainment (Declining DVD and Blu-Ray) Environment
The Motion Picture Association of America (MPAA) in its annual Theatrical Home Entertainment Market Environment (THEME) report revealed that physical media sales have decreased significantly worldwide over the past five years. Whereas physical media sales have fallen off, digital spending has more than made up for the gap. Another common oversight when creating a film Ultimates model forecast is not properly monetizing this change. Digital Home Entertainment contracts are complex with many nuances that need to be considered in the Ultimates model, given that digital film downloads (both Domestic and International) are on the rise. Having a well-experienced entertainment finance professional or consultant will help avoid any oversights when planning.
Need Help Creating a Film Ultimate?
Although these common mistakes happen all the time, they can be easily mitigated by seasoned finance professionals with experience in the Ultimates Process. If you have any questions, please contact 8020 Consulting for this unique Entertainment finance expertise. You can also download our free breakdown of our services by clicking the button below.
About the Author
Lester has over 15 years of professional finance experience in strategic planning, forecasting and budgeting, financial analysis, and business evaluation. Prior to joining 8020 Consulting, Lester was the Director of Business Planning and Analysis at Warner Bros. and had previously worked as a Senior Manager of Retail Analysis and Manager of Finance for The Walt Disney Company. Additionally, Lester has held positions at Thomson Reuters and Public Financial Management. In his career, Lester also operated as the Chief Financial Officer for a consumer goods start-up company, where he oversaw the Accounting, Finance, Operations and HR functions. Lester’s expertise centers around FP&A, budgeting and forecasting, financial modeling, cause of change analysis, consolidation, industry analysis, and project management. Lester holds a Bachelor of Arts in Economics from Stanford University, and an MBA in Corporate Strategy and Finance from The University of Michigan, Ross School of Business.
Entertainment Finance: Perfecting Film Ultimates
The Ultimates Process is an important part of evaluating a film’s performance. In this blog, we offer insights into the process and how to build and refine a Film Ultimate.
What is a film ultimate?
A film ultimate is the most complete prediction of the revenue a film will generate during its “first cycle” (i.e., 7-10 years from theatrical release) and allows all departments within a studio to better coordinate events and expectations to make the theatrical release a success.
Starting from the release date, the value of the future cash flow from all streams of revenue relating to the film are factored into the forecast. Although most major film studios conduct some sort of Ultimates process, it is important for all Entertainment Studios to perform such an analysis at least 18-24 months before a film is released.
Film Ultimate Revenues
Building perfect Film Ultimates starts with compiling all worldwide revenue streams throughout the lifetime of the film release. This involves coordination with several departments, and getting all stakeholders “on calendar” is critical to a film’s success. Let’s briefly look at each of these revenue streams:
Theatrical (U.S. and Non-U.S.)
This refers to revenue recognized over the exhibition period. Movies can run 4 months, as a film is released depending on the international release schedule, but most movies have about a 4- to 6-week run in theaters with about a 50% decay rate per week, depending on release timing, competitive releases, and movie genre.
Licensing and Merchandising
This refers to product placement that can be recognized as products hit shelves as early as 4-6 weeks before the film’s release. This can have a long tail based on the affinity of the brand and willingness of major retailers to keep the products on shelves.
PPV / VOD
The replacement of the traditional Blockbuster model, Pay-per-view and Video-on-demand occurs directly after the theatrical run, and it’s a great way to access the digital market.
Subscription Video On Demand (SVOD)
This is the most common revenue model many online video streaming businesses use today. Consider Netflix or Hulu Plus as examples, where users pay a fixed subscription fee once a month and have unlimited access to a variety of video content available on that platform. Studios are paid by these SVOD platforms through licensing agreements, which include a large upfront fee and/or a royalty for every viewing of your movie.
Home Entertainment
This usually occurs 3-4 months after the movie’s release. Although the market for DVD/Blu-ray/Digital has been declining over the last decade, Home Entertainment is still a large revenue driver for studios. Figuring out a way to differentiate this product vs. all the other PPV/VOD/SVOD choices is key to keeping the value proposition in Home Entertainment.
Pay TV
This refers to traditional Cable TV and Satellite TV. Studios make a significant amount of money from selling TV rights to networks on both premium and basic cable. However, with the cord-cutting phenomenon’s gaining momentum over the last few years, this revenue stream has begun to decline.
Free TV
Also known as Basic TV, this works very similarly to Pay TV, with licensing agreements selling TV rights to the broadcast networks.
Film Ultimate Costs / Expenses
Perfecting Film Ultimates not only consists of acknowledging revenue drivers, but also taking a careful look at the cost side. These are the estimated total costs directly associated with generation of ultimate revenues. Major cost drivers to understand when building the model are noted below:
Cost Amortization
This is based on estimated gross margin for the life of the film, which may change throughout the film’s life. A two-year calculation scenario is noted below to help walk you through this.
High Level Two-Year Amortization Schedule
Above is a Year 1 Scenario indicating Film Ultimate Revenues of $60 and Ultimate Costs at $40, which gives you $20 Ultimate Gross Margin while Year 1 revenue is $20. Applying the amortization schedule formula, we arrive at $13 as our costs to amortize (i.e., amortization expense) in Year 1.
Above is a Year 2 Scenario indicating Film Ultimate Revenues of $60 and Ultimate To-Go Costs at $27, which gives you $13 Ultimate Gross Margin while Year 2 revenue is $15. Applying the amortization schedule formula, we arrive at $10 as our costs to amortize (i.e., amortization expense) in Year 2.
However, in the film business, the Ultimate model may need to be changed as revised revenue assumption numbers materialize (e.g., SVOD viewing assumptions change). Below is an example of a revised Ultimate Revenue ($5 decrease) and the impact to the Ultimate model. You will notice that Gross Margin is now $8 due to Ultimate Revenue decreasing to $35. Applying the amortization schedule formula, we arrive at $12 as our costs to amortize (i.e., amortization expense) in Year 2.
Participations
This is conditional compensation for creative talent (e.g., actors, writers, directors, producers). Compensation paid, if any, is based on contractually agree-upon formulas and cash received (i.e., not revenue recognized). Formulas vary depending on star power of talent (e.g., gross deal vs. net deal).
Residuals
This is additional compensation for “ancillary” markets (e.g., DVD, pay TV, cable, network TV, etc). This is based on the percentage of gross revenues received by a distributor from ancillary markets. Compensation payments made to individuals or to the guilds on behalf of members such as SAG-AFTRA, DGA, WGA, AFM and IATSE.
Other Considerations
Other considerations in Film Ultimates Costs and Expenses include:
- Tax Incentives and Credits offered by various cities, states and countries to entice filming in their locale, which is treated as a reduction to film costs.
- Impairments after release of film due to certain events or changes in circumstances (e.g., Film Performance, Costs in excess of budget, delays, etc.).
Taking a Long-Term Approach to Film Ultimates
If you want to better understand and properly valuate your Film Ultimates, you need a partnership with both the domestic and international finance teams to intimately understand the revenue and cost drivers that go into the model, which will help you make better choices. And if there are any unforeseen changes to your assumptions, you need to understand why they changed and how it will impact business.
The injection of an in-house specialist or dedicated consultant into the mix can be just the boost that your finance teams need to structure the kinds of intensive financial ultimate models that keep their companies not just afloat in the short term, but thriving over the long haul. For a detailed look at how 8020 Consulting can help, download our entertainment finance services sheet.
If you’d like a broader exploration of operational finance in entertainment, you can also download our best practices guide for competitive mid-level studios by clicking the button below.
About the Author
Lester has over 15 years of professional finance experience in strategic planning, forecasting and budgeting, financial analysis, and business evaluation. Prior to joining 8020 Consulting, Lester was the Director of Business Planning and Analysis at Warner Bros. and had previously worked as a Senior Manager of Retail Analysis and Manager of Finance for The Walt Disney Company. Additionally, Lester has held positions at Thomson Reuters and Public Financial Management. In his career, Lester also operated as the Chief Financial Officer for a consumer goods start-up company, where he oversaw the Accounting, Finance, Operations and HR functions. Lester’s expertise centers around FP&A, budgeting and forecasting, financial modeling, cause of change analysis, consolidation, industry analysis, and project management. Lester holds a Bachelor of Arts in Economics from Stanford University, and an MBA in Corporate Strategy and Finance from The University of Michigan, Ross School of Business.
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