August 17, 2017

Customer Finance in the World of Software Subscriptions

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As technology vendors move to software subscriptions as their primary pricing model, it presents new challenges as they attempt to meet customer demands while also managing company objectives. Historically customer finance programs have been used as strategic sales tools for many reasons, not the least of which was reducing the need for large, upfront payments. So is customer finance still relevant in today’s world of subscription-based, pay-as-you-go pricing models?

We’ve come to learn that the answer is a definitive yes–we are finding customer finance is as applicable and important as ever. Here are some of the key reasons why having a robust customer finance program is crucial when vendors structure their deals as software subscriptions:

Accelerated Cash Receipts
This is the most obvious reason for a vendor with limited cash resources, or for any company, large or small, with investment opportunities or operational needs that demand funding. The customer’s expectation to pay-as-they-go in a subscription model is becoming the norm. However, the vendor often hopes to receive the cash up front to support the ongoing funding of the enterprise. So the two, with diametrically opposing objectives, are in a tough spot. A customer finance program is an ideal solution to satisfy both objectives concurrently. Moreover, if the vendor leverages a third-party with a wide variety of funding sources, the cost of capital is lower than if the vendor carried the debt internally.

Payment Flexibility to Meet Customer Needs
As licensing models get more complex, many companies’ capabilities in billing and collection systems and staffing levels are proving inadequate for the task. Customers may require a payment schedule different from what the vendor, with rigid product SKUs and inflexible AR systems, can accommodate. For example, a customer may want to defer payment for six months until the next budget cycle, then pay quarterly thereafter. The vendor meanwhile lacks the product SKUs and payment systems to meet the specific needs of this customer. A customer finance program can meet this customer requirement when the vendor would otherwise struggle to manage the ad hoc billing requirements.

Lower Billing and Collections Cost and Risk
With a third-party customer finance program, the vendor avoids much or all of the associated billing and collection costs (which may be considerable). In addition, the risk of non-payment of the fees associated with software subscriptions is totally avoided by receiving up-front payment in full—enabling reduced overhead, collections ease, and risk mitigation.

Improved Customer Retention and Add-On Sales
We’ve seen our clients leverage a customer finance program to enable them to offer longer, multi-year subscription contracts, avoiding the risk of non-renewal and wasted sales cycles (and we recently learned about the impact of multi-year subscriptions on profit). By establishing a financing “footprint” with the customer, add-on sales of more or complementary products often result. And third-party customer finance providers have systems in place to proactively address renewal opportunities before the customer begins to consider alternate providers.

Improving Channel Liquidity
Depending on how they structure partner agreements, vendors who don’t offer a customer finance program risk the liquidity of their reseller and VAR partners, who are on the hook to the vendor for products and services delivered, but may have difficulty or delays in collection. Offering a channel-enabled customer finance program gives relief to the channel, who can focus on winning more business.

For these reasons, vendors are realizing that a customer finance program can be a strategic tool to help the vendor, customers, and channel partners on subscription deals. Customer finance programs are so customizable today that they can be arranged as private label, giving the look and feel of vendor terms, incorporating the payment plan into an order document, etc. In the paradigm shift of pricing models and subscription-based license agreements, it seems that the customer finance program is becoming a strategic tool now more than ever. Savvy vendors are ready to leverage customer finance programs to meet a wide range of customer needs in this new, subscription world.

Have questions about how to set up and manage a customer finance program in the world of software subscriptions? Let us know!

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