The golden rule for accounting firms in a subscription-based economy
Over the last ten years, the world has evolved to a subscription-based economy. No longer is it just gym memberships, satellite television and mobile phone contracts that have the monopoly on this model. Darren Glanville from Kandooexplores what this means for the accounting industry and what it takes today for your practice to succeed.
The DNA of SaaS companies has subscription revenue at its core; following a simple, ‘golden rule’: scale clients, increase revenue and reduce the costs to acquire those customers. Should accounting practices be any different?
Most accountants wouldn’t disagree—they want to attract more of their ‘ideal’ clients, they want to upsell and cross-sell more of the services that they provide, and they don’t want to spend too much money doing so.
The transition to the cloud has not only brought changes to the way progressive firms define sales and marketing, but also a new set of acronyms to accompany these processes.
CAC (Customer Acquisition Cost)
When we speak of CAC, we mean the overall costs we incur to convince a client to buy from us (salaries, sales and marketing costs, etc.) divided by the number of new customers gained in that period. For example, $100,000 total annual spend and 1000 new clients will deliver us a CAC of $100 per client.
Accounting practices globally have long relied upon referrals from clients or word of mouth to acquire clients, and this is still true for the majority of firms today. The good news is referrals are by far are the most cost-effective method for new client acquisition compared to practices attending trade shows or events. Yes, even driving two hours out of town for an initial prospect meeting on the off-chance we can secure an ‘awesome’ new client (we’ve all done it).
While not all practices rely solely on referrals, some do. Others have benefited from a multi-channel approach. Consider deploying direct mail, increasing your web and social media campaigns, and events. Take a look at firms like Growthwise—an example I often share of a modern, forward-thinking firm—who openly package their offering and provide a guide on pricing for each level of ‘business ninjas’. The key here is that you monitor all costs, not just the obvious ones.
MRR (Monthly Recurring Revenue)
Firms need to focus on targeting and monitoring Net New MRR or Net New Monthly Recurring Revenue. This gives practices a calculation to work with: Net New MMR = New MRR (new revenue from new customers), plus Expansion MRR (new revenue from existing customers i.e. cross-sells and upsells) minus Churned MRR (revenue lost due to customer cancellations etc.) plus Contraction MRR (revenue lost as a result of a downgrade on price) or as a simplified equation
Net New MRR = (New MRR + Expansion MRR) - (Churned MRR + Contraction MRR)
We all know that it's easier to sell to existing customers than to find new ones, yet most firms I speak to are firmly in the camp of new client acquisition. They are are missing out on opportunities to increase Expansion MRR. There is also the potential danger of existing clients churning (canceling) if they are not aware you can provide more of the services they truly want. The primary reason for this is firms often focus too much on compliance or write-up work, and not enough on servicing existing clients better. Ignoring this can compound the effect of Churned MRR, so marketing and operations must be acutely aware of this.
This formula is a good indicator of growth or contraction for your practice, as you can see if you are growing at a sustainable and steady rate. Growth is difficult if you need to maintain high levels of new client acquisition, constantly have to replace lost revenue, or if you have a loyal customer base but aren’t attracting new clients fast enough to negate hemorrhaging revenue.
We can also expand MRR to give us our Annual Run Rate (ARR), which is a simple multiplication of current Net New MRR x 12 (i.e. $100k = $1.2m ARR).
LTV (Lifetime Value) or CLV (Customer Lifetime Value)
One of the key things that I recognized as I first embarked upon my career with accountants many years ago, was one fundamental difference between accountants and other service professionals such as lawyers and architects. Accountants always recognize the lifetime value of a client, while the legal profession and architects predominantly view client engagement as transactional.
One of the benefits of calculating LTV or CLV is the measurement or prediction model for the monetary value of a customer relationship over the long-term, which shifts the view from short-term of months, to years. It's not uncommon for accountants to have a great LTV (6+ years), but the interesting thing here is that firms often still think of the client in terms of a monthly fee—for example, $300 per month or $3600 a year, rather than being a $21k client over the lifetime ($300 x 12 x 6 years).
Acknowledging this can have a very different outcome on how we treat those clients, the services we provide, and how we value them. Measuring LTV is also an excellent way to segment our clients as we can often have a great LTV, but the relative spend with us, or our ‘share of the wallet’, could be low. The question must then become, “how can we expand upon that?”
Only by scrutinizing the LTV can we truly get a deeper view. Otherwise, you could be delivering services for an extended free period if the MRR is low and our CAC is high—you simply may not have the fuel in the tank to go and acquire new customers
Accounting practices are not exempt from the evolution to a subscription-based economy—in fact, the industry is now firmly entrenched in this model. To thrive in this age, your accounting firm must embrace the golden rule that SaaS and many other subscription industries have adopted long ago.
If you are able to consistently scale your clients, increase revenue, and reduce the cost of acquisition, your accounting practice will succeed. It’s that simple.
This article was written by Darren Glanville, Founder of Kandoo.
Darren has more than 20 years’ experience helping accounting practices develop strategies and processes to drive efficiencies and profitability. Prior to founding Kandoo, Darren was UK Sales Director for Spotlight Reporting and has worked for Xero, CCH and Sage.