Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

by Tien Tzuo

we realized that this model may have worked fine for the last five hundred years, but it was entirely wrong for a subscription business, for three key reasons. First, the traditional income statement does not differentiate between recurring and nonrecurring dollars. It’s like saying there’s no difference between a dollar and a dollar that keeps happening every year for the next ten years. Recurring revenue is the cornerstone of subscription businesses, but traditional accounting concepts were never designed to recognize this fact. Second, sales and marketing is matched to past goods sold. It’s essentially a sunk cost. I’ll get into this later in the chapter, but subscription businesses need to think strategically about sales and marketing spend going toward driving future business. And finally, this is a backward-looking picture—it’s all about money already earned, expenses already paid, actions already taken. Subscription businesses are all about forward visibility: how much money I know I can count on over the next twelve months, so I can account, plan, and spend accordingly.