How Product-As-A-Service impacts finance and accounting

As-A-Service models will have a strong impact on your financial statements, KPIs, and accounting procedures, driving tremendous changes in the Office of the CFO. When deploying As-A-Service programs, here are some of the top financing and accounting considerations to discuss.

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Financial communication 

The revenue recognition rule associated with the new revenue streams can be quite different compared to business-as-usual. This is especially true for revenues coming from core services priced using brand new models and even more so for services beyond traditional financial services, including subscription bundles that, from an accounting perspective, are complex.

Depending on the specification of your offer and the way you fund it (which risks you keep or externalize), you may have to apply IFRS 9 (Financial instruments), or IFRS 16 (Lease accounting). 

There is even a strong chance that the revenues may actually fall into accounting standards such as IFRS 15/ASC 606 (similarly to commissions, advisory contracts, bundled products, credit cards and loyalty schemes, but with potentially different rules). This could mean substantial challenges from both a process and a workload perspective for a company’s finance team.

KPIs definition and implementation

As-A-Service has revolutionized the financial game, and KPIs are no exception. Gone are the days of dwelling on past events and budgeting. Instead, the focus is on creating a brand new business model that prioritizes predictability.

Common KPIs used in the As-A-Service business model:

Annual Recurring Revenue (ARR)

ARR is the amount of revenue a company expects to repeat in a year, which provides a holistic view of a company’s health. With ARR as the foundational metric, companies can forecast revenue, set realistic goals, and make informed decisions to maximize growth. 

For example, recent Subscribed Institute and Boston Consulting Group (BCG) research analyzing ARR indicates that more companies are adopting hybrid consumption models and these companies outperform all other businesses when it comes to year-over-year (YoY) ARR growth.

Churn Rate (Attrition Rate) 

Churn rate is the rate at which a business loses subscribers, and something that becomes critical as you grow your subscriber base. It is 5x more expensive to acquire a new customer than to maintain an existing one. 

As one digital innovation exec at an IoT company notes, “Customer retention, at a very high-level, is paramount. If you spend money to acquire customers but you lose them as fast as you acquire them because you don’t provide the right experience, then it’s an economic business model that will not scale at all.”

Customer Lifetime Value (CLV)

CLV may be a novel concept for many manufacturers. It’s the expected net present value of profit across the entire customer lifecycle, taking into account the cost to acquire, serve, and maintain. It is a critical indicator to model across different dimensions and cohorts in order to assess, for example, go-to-market resources allocation, acquisition, retention strategies, etc.

Net Revenue Retention (NRR)

NRR calculates total revenue (including expansion revenue) minus revenue churn (contract expirations, cancellations, or downgrades). NRR measures your ability to retain and expand customers. It can be seen, in short, as your customer base organic growth.

Financial procedures design

Setting up an As-A-Service model is going to introduce a whole new set of financial and operational dynamics that require some adjustments in various financial procedures. 

The shift from a traditional one-time purchase model to an As-A-Service model is a game-changer that impacts revenue recognition, customer management, billing cycles, and more. So, let’s dive into some of the key changes and important things to consider when it comes to the financial procedures when adopting an As-A-Service model:

• Revenue recognition 
• Billing management
• Expense management
• Financial forecasting
• Pricing strategy
• Compliance and reporting

Shareholder’s value increase

The notion of shareholder value encompasses the financial benefits, such as capital gain and dividends, that shareholders derive from their investment in a company. In the context of As-A-Service business model, we are confronted with a recurring revenue stream that has the potential to impact shareholder value in multiple ways. 

It is important to acknowledge, however, that the actual effect will be contingent upon the successful implementation and management of the model. Presented below are several ways in which the As-A-Service model can potentially augment shareholder value: 

• Predictable revenue stream
• Customer Lifetime Value enhancement
• Scalability
• Customer relationship improvement
• Market valuation is higher thanks to the recurring revenue model (predictability and stability boosting market valuation)
• Competitive edge 

All the above considerations will have a tremendous impact on the type of As-A-Service solutions you will create, so they should be treated with high importance. Additionally, both the specific implementation and the manner in which these financial concepts are utilized will be influenced by the company’s ownership structure, whether it’s private-equity owned, publicly traded, or venture-backed.

The complete playbook to launching your own Product-As-A-Service solution

Despite the fact that the As-A-Service literature is quite vast, executives from the “physical product world” are often left behind due to the lack of concrete guides on deploying Product-As-A-Service models. The vast majority of literature falls short when it comes to explaining what to do from a funding, finance, and accounting standpoint.

The Secrets of Physical Product-As-A-Service whitepaper will offer you the essential advice for effectively building your own solution and the strategies employed by industry leaders.