Right now, the dominant monetization models for software providers (perhaps not surprisingly), are perpetual licensing and subscription-based licensing. But within the next 12 months, the move toward usage-based licensing will accelerate, growing as much as 48%, according to our 2020 Monetization Monitor survey, alongside continued growth in subscription licensing (at 52%).
Here’s the thing: most enterprise software companies aren’t anywhere near ready to make the jump from subscription to usage-based. They may even face challenges moving their base toward (and gaining user acceptance for) subscription models. Depending on your market and application type, perpetual licensing models are still used, a lot. They have extensive to moderate use at nearly 80% of the businesses we surveyed. Vendors, especially those with more than one licensing structure, said they are struggling to gain customer acceptance, align price and value, and are still wary of the risks of changing monetization models, especially in a volatile economy.
It was with these real challenges in mind that we recently hosted an expert panel to talk about trends in software pricing and business models. Joshua Bloom, Executive Vice President and Partner, Simon-Kucher & Partners joined me and my colleague Eric Jensen, Solution Architect, to discuss what we’re seeing successful customers do, some advice on how to ease the moves and unwrap the advantages of doing so.
In beginning to think about how to transition models from perpetual to subscription to usage based, it’s important to remember that they can build on one another and help to deliver value to customers when they need new or upgraded functionality and are ready to consume it in a new way. Here’s some advice on how to get started and continue on the journey.
- Create a feature or service level differentiation between perpetual offerings and subscription offerings. As you are encouraging customers to move to subscription models, give some sort of incentive to the customers that won’t have the software vendor engaging in an endless cycle of discounting. For instance, in selling its Office 365 vs. on-premise Office product for consumers, Microsoft touts the access to “free” upgrades and automatic security patches, as well as the ability to share the apps across six different devices, for the former. Microsoft Office 365 consumers now number 5 million.
- Give the sales force flexibility in the contract structure. Because sales forces need flexibility to sell products and services, Bloom said they’re seeing a willingness to support multiple pricing models as a result. Contracts may include fixed pricing in the style of enterprise licensing agreements, along with alternative pricing metrics, such as packaging certain functionality by subscription. Vendors are willing to absorb that level of complexity in contracts because of the benefits it provides to the salesforce in winning deals.
- Operationalize sales for success. Supporting a subscription structure of course requires that the sales structure adjust to a new sales cycle and close that places much more emphasis on nurturing the relationship long-term. Set up a strong customer success function that includes onboarding and training, technical support, and ongoing proactive optimization of the customer’s products. Restructuring the sales organization doesn’t have to necessitate a hiring and firing cycle. There are likely members of the sales team that have the skills suited for a customer success role. Moving people around internally will create less friction during a change management process that can be already be fraught with difficulty.
- Be mindful that changing licensing and pricing affects business functions beyond sales. A shift to subscription and more advanced pricing models also requires that the business must consider how it will recognize revenue from these more complex revenue models in accordance with accounting standards. Make sure to look at your own software – your ERP system – to ensure it can ease and automate this change in revenue recognition.
- Think about how things will change for the customer. For customers moving from a perpetual licensing to a subscription model, there is more to account for than just how the expense hits the balance sheet. Moving off perpetual licensing means moving onto perpetual upgrades. And for a company that has been on an annual upgrade cycle or (or typically much longer than that), getting all functions used to that new upgrade process – in particular the IT department – is a big deal.
- Focus on the data. The subscription model brings with it a host of advantages in terms of the data it provides. This will help the business make better decisions about how to sell, who to sell to and more. The business can begin to develop a solid way of measuring customer acquisition cost and customer lifetime value, as well as readily identify trends that will help better target marketing spend. Getting an even more granular view of data by applying usage analytics will help make the data much more usable and consumable across functions – from sales to marketing to product and engineering – that will help businesses make decisions on how to structure subscriptions for optimal uptake and highest value.
Taking steps to get the right people and processes in place in the move from perpetual to subscription licensing will provide a stronger foundation for moving to usage-based licensing – and adopting the tools like Usage Intelligence will make that journey easier and more data-driven. Be sure to check out the complete panel discussion and let us know if you have any questions or comments below.