Moving to a Software Subscription Model

The debate about whether the software industry will move from a traditional license and maintenance model to a subscription-based model is long over. There is now widespread adoption of software-as-a-service (SaaS). In fact, many traditional enterprise software providers have been forced to make the shift to SaaS.

“ By 2020, all new entrants and 80% of historical vendors will offer subscription-based business models”

“SaaS has not killed the software market, but is growing rapidly and pressuring legacy providers to include SaaS options or risk losing market traction,” explains Laurie Wurster, research director at Gartner.

Gartner predicts that by 2020, all new entrants and 80% of historical vendors will offer subscription-based business models, regardless of where the software resides. “What began as a trickle a few years ago has become a stampede of vendors wanting to make a move to a subscription business model,” Wurster says.

IT leaders who successfully transitioned their organizations — whether on-premise, hosted or in the cloud — encountered many of the same challenges. Wurster shares a few of the lessons they learned along the way — from the common sense to the painful.

Ease into the transition

You do not have to move all customers and products to the new subscription offering at one time — nor do you have to stop selling products through your traditional model. Ease into the change by offering options and and new products for customers with a subscription-first strategy. At the same time, maintain your traditional model for existing products and customers during the transition.

Move new products and customer contracts first and then convert existing customers to keep acquisition costs low. Be sure to provide flexible license options. When creating your transition strategy, be sure to also:

• Aim to convert 50% of your existing customer base. Do this within a specific time frame to minimize impact on your financial statements.
• Include a cross-functional team in strategy development. It’s important to include your internal and external stakeholders across lines of business to ensure success. Whenever possible, select representatives with subscription experience.
• Realign sales and partner compensation packages. This encourages behaviors that actively support the move to subscription. Retrain and modify professional goals as necessary.

Improve the value of your software

Make it easy for customer and prospects to purchase with try-before-you-buy programs and modular, add-on capabilities not typically offered by the traditional model. Both are ideal for introducing new features to new and existing customers. For example, you can turn capabilities on or off via user access to a SaaS solution.

Try-before-you-buy programs modular options also help to differentiate your SaaS model, improve the value of your software and provide more predictable cash flows.

“ Be prepared to demonstrate the value of moving to a subscription model to sales, customers and partners”

“Subscriptions provide better entry-level pricing and the ability to add features as customers mature and gain value from the initial experience,” says Wurster. “This is especially critical for new entrants who want to lower financial barriers to new technology adoption and create sustainable, recurring revenue streams.”

Additional recommendations for improving the value of your software:

• Ensure cloud or hosted subscription/SaaS products are more flexible than traditional offerings.
• Leverage the analytics across your community of end users.
• Integrate new features into your go-forward plan to support higher prices and user growth.

Ensure partner and reseller revenue streams remain intact

Be prepared to demonstrate the value of moving to a subscription model to sales, customers and partners. Sales will want to be reassured that they can make as much or more over time. Partners will want to ensure they are not cut out of the value chain as subscription models eliminate or reduce some revenue-generating services and fees.

“ Offer helpful business models to offset former license fees”

“Vendors have told us that without training for both partner and direct sales teams, the partner and customer acceptance of subscription pricing can be completely derailed due to misconceptions,” explains Wurder.

This is one of the biggest transition pain points IT leaders experienced. To combat misconceptions, follow these recommendations:

• Educate direct sales and partner field teams. Help them understand how they can make as much or more with the SaaS model.
• Provide partner-only content streams and tooling. This will allow them to replace no longer needed, implementation and configuration activities with additional, value-added services.
• Offer helpful business models to offset former license fees. Do this for partners who use reselling licenses as a significant part of their business. For example, provide training or managed services to the customers they have relative to the new SaaS products.

“Although some of these lessons appear as easy as common sense changes, others were a bit more painful,” says Wurster. “Nonetheless, they provide IT leaders with a solid starting point in making the transition to subscription."

This article has been updated from the original, published on November 12, 2015, to reflect new events, conditions or research.