Next year all new entrants to the software market and 80% of historical vendors will offer subscription-based business models reports global research and advisory firm, Gartner.
This change reflects a brisk move away from software ownership and the traditional license and maintenance model.
Many organizations prefer to lease software on a subscription basis because it lowers the upfront fee, plus it enables them to more carefully manage their costs and see whether the new solution can prove its value over time.
A common misconception is that the move to subscriptions also means transitioning to the cloud. Subscriptions can however be offered for software or hardware, independent of where they reside. And, while SaaS, IaaS and PaaS are the future, on-premise solutions certainly aren’t yet redundant. McKinsey and Company found that the demand for on-premise subscriptions actually rose from 63% in 2015 to 82% in 2017, defying popular opinion.
This is not to ignore the seismic shift in the overall adoption of cloud services. It is estimated that 41% of enterprise workloads will very soon run in the public cloud and 22% on hybrid cloud platforms.
Here are the main things IT providers need to consider before making the transition to subscriptions, and eventually a SaaS led model.
Ease into the Change
You don’t need to move all of your customers and services over to subscriptions at the same time. Keep your current business model in operation and focus on moving new products and new customer contracts over first. Then gradually convert existing customers so as to lower your acquisition costs.
It’s also possible to combine on-premise subscriptions with SaaS solutions in preparation for your customers’ eventual migration to the cloud to avoid the challenges posed by undepreciated perpetual licenses. The more flexible you make your license solutions; the more likely customers will make the change with you.
Don’t forget to set a clear time-frame for the overall move and make sure to implement a cross-functional team strategy to ensure the success of the project. McKinsey and Company suggest aiming for a 50% conversion for existing customers.
Give Your Subscribers Added Value
New customers want lower financial barriers to technology adoption. This is why it’s important to entice them with free trials and add-on capabilities, offers which they wouldn’t otherwise receive through a traditional model. “Subscriptions provide better entry-level pricing and the ability to add features as customers mature and gain value from the initial experience,” explains Wurster.
By expanding your portfolio and integrating more new features, you can also support higher prices and draw in a larger number of customers for the long-term.
Careful analytics can help you to keep refining your offer so that customers get the ‘best-fit’ products and services.
Convince Every Team Member to Get Onboard
The team members that most need to be convinced of the rewards of the subscription model are sales, especially if the goal in the short-term is to run subscriptions alongside the existing perpetual license model. “Any commission-based salesperson would naturally be incentivized to promote the traditional license to maximize commissions and quota retirement,” says Ravid.
This is why it’s crucial to reassess how sales incentives are rolled out. Commission can be based on the number of new subscriptions booked or on increasing utilization, for example.
All teams do need to be onboard and some, including finance and IT will need more encouragement than others.
The landslide shift to subscriptions has already happened – it’s just a matter of making sure that the process, the benefits and the vision are clear so that progress isn’t derailed.