Subscription is a highly flexible software monetization model. Understand its benefits and consider best practices for implementation in order to maximize the long-term revenue growth opportunities of this rapidly growing model.
Software buyers are leading a major shift in software monetization. The perpetual license model, once the core software monetization model, is giving way to the subscription model. Buyers are making the move to take advantage of subscription’s benefits: the flexibility to adjust subscriptions to meet their needs at price points aligned with value; the ability to purchase software as operational (rather than capital) expenditures; and to better serve their own customers’ needs.
Two key benefits are behind the move to subscription. First, subscription offers a monetization opportunity. Its recurring revenue generates more value than the perpetual model. The “cross-over,†or point when suppliers begin recognizing more revenue with subscription than with perpetual licensing, is often around 3-4 years for renewing customers. (This can vary with industry.) Because customers lay out less cash initially for subscription, they’re often receptive to buying additional products and services—adding to the supplier’s revenue stream.
Second, subscription can expand market growth. Its flexibility makes the subscription model highly adaptable, meaning it can meet customer and market needs. The low cost of entry can appeal to smaller or more budget-sensitive accounts; the flexible, pay-over-time system may also appeal to larger accounts that have limited budgets for perpetual licenses. Subscription contributes to customer loyalty by offering license models that are suited to how customers buy and use software, including accounting or the software as an operating expense for the duration of a project.
For a supplier’s move to the subscription monetization model to be successful, it must deliver value continuously; provide visibility into product usage, with insight into license consumption; streamline software operations, through features such as electronic software delivery (ESD), self-serve options, or automated email notifications of license; and work within part of a hybrid model (which may have a usage-based component, for example). Above all, the subscription model must provide a consistent customer experience in order to keep the customer relationship healthy
So, what are the keys to keeping up with the business model that meets your customers’ expectations? The following tips provide a framework for success for a robust subscription business.
1. Weigh the pros and cons—for software buyers and suppliers
Software producers must provide the right model for customers. While subscription is appealing for many businesses, it isn’t a match for every service. When considering the move to subscription monetization, keep in mind that the pros and cons will be different for suppliers than for buyers. For a supplier, benefits of the subscription model include a predictable recurring revenue stream over time; wider market appeal with more options; less need to discount, since the offering can match customer needs; and the ability to gain or retain customers, since doing business is easier with this model. On the flip side, business changes; revenue deferral through a change in recognition; and revenue uncertainty may be seen as cons.
Evaluating the model from the perspective from a buyer’s point of view will help ensure that the model is designed with users in mind. Pros for a buyer include the lower cost of entry, wider solution access for a given spend, sales that are focused on an engaged relationship (vs. a new sale), and the ability to remix or adjust based on usage needs. Not as appealing to a buyer may be the higher total cost of ownership (TCO) and the uncertainty of spend for future needs.
2. Consider operational impact
What’s the most significant downside that suppliers encounter when they move to subscription? The required change of business processes.
Because these can impact teams and operations throughout an organization, all key decision makers in your company should be involved in the decision to move to the subscription model. Consider each of these areas as you evaluate the operational impact:
- Sales compensation,
- Revenue recognition,
- Pricing structure,
- License key generation,
- Roll out to customers and to channel partners,
- Subscription period,
- Renewal process,
- Product behavior upon expiration,
- Co-termination/alignment,
- Legal agreement review, and
- Product/part numbering.
3. Phase it in
A phased-in adoption of a subscription monetization model is more likely to be successful than an abrupt change. New companies can begin their business with a 100% subscription model, but established companies with existing perpetual models will need to take transitional steps to change to subscription. Finance teams, in particular, need to evaluate all elements of the fiscal landscape (e.g. when revenue is recognized; when sales is compensated). Making sure that your installed customer based is fully supported is a critical step, as well. Customers can’t adapt instantly, but need time to get accustomed to new operations. To ease this process, it is often beneficial to roll out your subscription-based offering for select products, then test them with customers and your sales team. Doing so will provide meaningful information on pricing, packaging, and acceptance, which will help you make informed modifications to your offering and future plans.
4. Get feedback from your customers
Finally, remember that customers are your core. Their feedback is critical to your success. From onboarding through renewals, remember to manage the entire customer lifecycle well. Guesswork won’t cut it. Measure product adoption and understand your customers’ needs. Establish a process for getting to know your customers well and ensuring that they’re receiving the value the need.