July 14, 2017

A Funny Thing Happened on the Way To Subscription Pricing

Pay as you go, utility, consumption, subscription, and the cloud have been the rage during the past several years.  As a result, many vendors scrambled to adjust their offerings to meet the perceived needs.

The key drivers of this trend were:

1) OpEx budgets were plentiful in the good old days because most IT products were treated as capital assets.  In some ways, operating budgets were easier to sell to than capital ones.

2) The perceived advantages of seemingly lower costs and not having to make a long-term commitment (true only if one compares a one- or two-year cost to owning an asset that can perform over a much longer period, and if there are no costs to switching platforms).  Already, early adopters have come to realize that the yearly costs can stack up over time and can far exceed buying and owning your own licenses and IT assets.

3) Some customers have strategically chosen to divest themselves from owning and maintaining their own IT infrastructure.  This last point can be a smart option for those customers for whom IT is not a differentiating core competency; however, this may not be the right solution for everyone.

From the vendor side, in addition to the need to respond to customer demands, the successes of some cloud services providers and select vendors who converted to all subscriptions have everyone racing to put out new sales models or convert completely.  The lure of an automatic annual renewal is also tantalizing.  Many believe that this can significantly lower the cost of sales, free up resources to focus on new or additional products and services sales, and is less prone to pricing erosion at renewal time.  For some leading-edge products with few viable competitors, that may be true for a while. However from what we have seen from our clients we also found some issues:

  • Subscriptions and monthly or annual contracts means your installed base is now more exposed than ever to competitors, instead of every three or four years for perpetual or multi-year contract refreshes or upgrades. As a result, there is an even greater potential for price erosion.
  • The cost of renewal is heading higher as more resources have to be devoted to selling, managing and tracking contracts, and annual renewal means much higher touch points.
  • Annual billing also means significantly lower cash flow.

And, a funny thing happened on the road to OpEx expenses–with this massive movement towards subscription and pay as you go, many customers are finding themselves exhausting their once plentiful OpEx budgets.  We are actually seeing increasing customer requests to structure their new acquisitions as capital expenses.

The moral of the story is those hot trends that everyone is talking about are not necessarily what is going to help close the deal nor the automatic easy street to higher revenue, profits and cash flow.  Fear not, because with the right strategy and execution, you can turn your sales, whether perpetual, subscription, or consumption, into long-term commitments and upfront cash flow.  Knowing your customers’ economics and budgetary drivers and having a broad portfolio of programs that are aligned with the appropriate financial structuring capabilities are the keys to success.

With the upcoming accounting changes (especially ASC 606), now is the time to make sure your product program portfolios are tuned to take advantage of them.  At TFP, we have been working with our clients to map out “win-win” solutions in this new era–budget flexibility and a good deal for the customer, and multi-year commitments with better account control, plus maximum revenue, margin, and cash flow for the vendor.


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