The Move to Usage vs. Ownership of Technology & the Impact on Sales Cycles
Piggybacking on Nora Yam’s recent blog: A Funny Thing Happened on the Way to Subscription Pricing, I’m taking a look at how the move to the cloud and changing accounting rules are impacting the sales cycle:
As software vendors continue their shift to the cloud, looking for higher stock valuations and lower costs, the shift can lead to delayed sales cycles and unintended outcomes.
Budgets: Most enterprise software sales have long sales cycles. Customers have planned for on-premises solutions which were budgeted for in the prior fiscal year. In the world of perpetual licenses, capital budgets may have been already allocated.
When selling hosted solutions in the cloud, operating budgets–generally larger and more flexible than capital budgets–are being tapped. What’s the issue then? Most customers’ operating budgets are being hit with unexpected costs during the transition. Without a strong business case the sale may be delayed until the next budget year. The cloud is putting pressure on operating budget availability.
Accounting: The move to ASC 606 is causing sales delays for vendors for on-premises subscription acquisitions. If the vendor has not yet made the accounting transition, they are caught in a Catch-22. Most subscriptions sold today under current accounting rules are booked ratably over time, providing for deferred revenue (now highly desirable). However, upon transition, the deferred revenue will suddenly disappear, reappearing in retained earnings.
Pricing: Sales teams must now present their pricing and value propositions in a new light. This can cause confusion for both parties, and that confusion causes delay. Vendor deal desks, systems engineers and sales managers are being tasked with comparative pricing exercises and new ROI or cost-benefit analyses. The end-user is facing the same dilemma; there are few benchmarks for “fair pricing” in the new world order. To quote Dean Lane, CEO of the Office of the CIO: “Confusing pricing that does not scale does not help your sales effort — it makes it easy for me, the customer, to walk away.”
Compensation Plan Alignment: Comp plans are difficult to change mid-stream and we find many compensation plans drive perpetual licenses or paid upfront on-premise subscriptions when the vendor (and the shareholder) are interested in the move to the cloud. The deal desk and revenue operations teams are often caught in this conflict – increasing requests for sales exceptions and management involvement.
Hosting partners: Choosing the right hosting partner is now a critical part of every decision. Is it AWS? Azure? Google Cloud? Now there’s another price point to be considered and, more importantly, another reliability and compliance consideration for both parties. Training the sales team to sell not only their solution but that of the hosting partner will remain a challenge.
Takeway: Well-prepared enterprise technology vendors who have planned ahead will be able to leverage all of the challenges above, turning hurdles into opportunities. Sales teams will need more support, not less, during any transition in licensing models. Make sure to leverage all of the tools, training and support available from your hosting & channel partners. Provide more training for your internal deal desk. Ensure alignment of your compensation plans with corporate objectives. Make sure your company is prepared to be nimble – if you execute, there is market share to be gained in the next 18-24 months.