Traditionally, CFOs focus on cost and cost control when managing the financial actions of a company. “Value” is assessed by putting a quantifiable number behind everything.
It’s time to shift that mindset and take into account a different kind of value—the kind you can derive from an investment. Rather than worrying solely about the bottom line, ask the question: If you spend more today, what will you end up creating tomorrow?
This question speaks to how the role of the CFO is evolving. We must focus more on future value and what an investment can yield in the long term. By thinking strategically, we lead the charge for company growth at an efficient scale. Every decision has a financial impact, and those choices can now be evaluated as data-driven decisions with tradeoffs.
Take a Value-based Approach to Financial Assessments
Of course, CFOs must adapt based on the business they’re in and how that business is run. Most traditional businesses look at historical patterns, while SaaS companies often use ratable revenue recognition, both of which can rely on a spreadsheet to forecast business.
At Snowflake, we developed a very different business model that charges customers based on consumption, not subscription. As a result, our finance professionals don’t turn to spreadsheets to forecast our revenue. Instead, they deploy modern technologies, such as machine learning and AI. We use historical customer usage patterns to make projections on future usage. And we make assumptions about future customers by applying similar usage pattern projections, based upon the type of customer and the industry.
These are complex calculations, which is why we use modern technology. It’s something I never had to do until I came to Snowflake, and very few CFOs use this strategy. It’s the nature of our business, and this fundamental difference makes us do things in a different way. However, just because we’re a SaaS company doesn’t mean our value-based approach shouldn’t be adopted by CFOs who work in a more traditional business model.
Shift to Consumption-based Pricing
Every company starting out today would be crazy not to start with a utility and consumption-based model. Why? Because every customer wants it. As a CFO, I’ve been talking to customers for years, and I know everyone only wants to pay for what they’re using, myself included. I hate shelfware. Consumption is the direction everything is moving.
The biggest challenge is around systems. Until the last few years, the only companies that operated as truly utility-based companies were the big telecom operators or the energy companies that had meters on their products.
The second challenge is that usage-based businesses tend to have invested hundreds of millions of dollars on billing engines in order to track customer-specific usage. There are practically no ERP systems that do it out of the box, which means any company that uses this billing engine today has likely spent a small fortune.
Both challenges can act as blockers, but it’s short-sighted to let something like a sunk cost slow down future opportunity. Increasingly, the utility model will be adopted by startups and challengers in every industry, which means now is the time to address these challenges and figure out how to operationalize a consumption-based model so you can benefit from this inevitable trend.
How to Make the Shift
When you make a big shift towards a utility model for your product or service, you need to redefine your product or offering. Four factors must be considered:
- How do you price a utility model?
- Revenue model transitions are extremely painful. How will you handle this transition?
- Do you have the right processes and systems in place internally to handle the change? This is where a lot of companies will fail because there aren’t many systems that can handle these new requirements.
- Data presents a huge challenge. Data is becoming so critical, and the faster you have accurate data, the faster you can act upon it.
Not surprisingly, the biggest necessity for CFOs today is to use a modern cloud data platform. When you can run analytics and pull data quickly, it allows you to make truly real-time decisions within a quarter and to course-correct when needed, ensuring you have the right outcome on your financials at the end of the quarter.
In my life, I’ve never been at a company where we’ve re-forecasted revenue on a daily basis by customer. Now I do, and I can see our customers in real time. For example, I can look at the top fifty over-consuming and under-consuming customers and ask real-time questions around consumption. I can see how my margins are tracking based on our data on all customers.
We have this capability at Snowflake. And it’s a great use case for almost every customer on Snowflake: to have real-time insights into your own customer data, both on the revenue and cost-of-delivery side.
Become an Advocate for Value
Consumption-based businesses are new in the software space, and CFOs should lead the charge and educate internal teams, customers, and prospects on the value of this approach. The back office is no longer the best place for a CFO, if it ever was. It’s important to get out and talk with prospective and current customers.
For example, I get involved in a number of deals and act as executive sponsor on certain accounts to help explain the value of our product. One of the main topics of conversation with prospects is explaining how my teams use Snowflake’s Data Cloud. Specifically, all of our financial planning, modeling, and forecasting is done on our product by using real-time data on customer usage to predict future usage. Regardless of the product, CFOs should understand and, ideally, use their own software or product so they can speak to its use cases and, when relevant, educate on how to forecast for this type of consumption.
Another topic I address relates to questions from prospects and customers about the cost of using Snowflake by explaining the value customers derive. With consumption-based pricing, every performance improvement made to the product equates to customers doing more with the exact same number of credits they already paid for. While price per credit may stay the same, additional value can be derived from the same amount of credits.
That means every release is another form of discount, and every performance improvement is passed on to customers. This pricing and value model works across consumption-based businesses, and CFOs are uniquely positioned to champion these financial benefits.
CFOs: Lead the Charge for Growth at an Efficient Scale
Company founders and CFOs ask me all the time for advice on what strategic actions to take, and I always tell them the same thing: there’s no magic answer. There is no playbook. Every company and situation is unique. Any advice should be predicated upon specific facts, circumstances, and a look at the entire team. It’s all based on what’s presented to you.
With that said, here are the best pieces of advice I have to offer:
- Make sure your systems and technology will scale. This intrinsic capability can make or break your ability to grow with ease and impacts financials.
- In order to follow that first piece of advice, you must interact with teams across the company on a daily basis—from Sales and Support to Engineering and Product Management. You should know what product and performance improvements are coming so you can adjust revenue forecasts and understand where needs exist to inform things like hiring and corporate development.
- Don’t hire for the job today but for where the job is going. If you’re in a fast-growth environment, you end up needing to hire above or replace people if you don’t hire for where the job will be in the future.
- Establish a true partnership with the CEO. While every relationship will be different, trust and alignment are key to success and build clarity for the organization as a whole.
It’s so critical to have the right team in place and to maintain a focus on the future value of investments. As CFO, it’s more important than ever to keep one eye on the numbers and the other on how to grow strategically.