We’ve been talking a lot about the rapid transition of enterprise software selling from perpetual licenses to subscription models. We’ve written about the availability of operating budgets and why offering payment terms is critical for vendors who intend to sell subscriptions.
What we haven’t discussed to date is the impact of subscription pricing on value selling. Should you be adjusting your value selling methodology and practices when you sell subscriptions? What changes and what stays the same? And what should I do differently if I want to be successful?
We’re glad you asked!
What Hasn’t Changed—Benefits
Regardless of the deal structure you’re offering to your customers, the actual values delivered by your technology aren’t likely to change significantly. If your solution helps your clients reduce costs, improve productivity, enhance revenue, or improve compliance in one or several ways—those use cases are likely to apply whether you’re selling on a perpetual or a subscription basis.
If the delivery of your technology is changing from premises-based to the cloud there may be additional benefits you can add to your list: avoided hardware spend, data center cost avoidances, reduced energy consumption, etc. Often (but not always!) subscription pricing is associated with cloud-based delivery, and you need to be sure to capture those extra values.
But if delivery isn’t changing and only the deal structure has evolved, we have found that infrequently do the benefits change meaningfully from a perpetual deal structure.
What Has Changed—Need for Speed
As our clients have begun selling subscriptions, we have noticed sales cycles begin to compress. We are seeing one to two quarter cycles, instead of the three to four quarter that we were used to.
As the sales cycle compresses, the need to get out a viable ROI model quickly becomes crucial. If our experience is any indication, you need to build use cases specific to your opportunity in days rather than weeks—and sometimes even in hours.
As we’ve discussed in the past, Excel is the most flexible and powerful ROI platform. You can’t wait for weeks to customize your online calculator to the needs of the specific opportunity that you’re hoping to close this quarter.
And you need available ROI experts who are trained, experienced, and ready to go as soon as the need for cost justification becomes clear (or even earlier). For some companies, that means a staff of value engineers with financial modeling and value selling expertise. For many others, that means they have access to third party experts who can jump in and build a compelling ROI analysis in days rather than weeks.
In the perpetual world, modeling customer-facing costs can often be a straightforward affair: price the perpetual license, determine the annual maintenance, and add in any costs associated with deployment like training and services.
In the subscriptions world, you may need to model costs monthly or according to a specific payment schedule. And if your pricing model is on a usage basis—on the basis of named or concurrent users, or by number of sessions or transactions, etc.—you may need to take this into account. This may be especially important if you’re also trying to model seasonality dynamics. All of this can make the cost modeling more complicated.
Again, Excel—thanks to its legendary flexibility–is likely the best approach for capturing the peculiarities of subscription pricing.
What Has Changed—Model Timelines
By default, we at TFP try to model five years of costs and benefits unless we get specific direction that requires to do otherwise.
But with subscriptions, we may need to take into account that your analysis covers a limited (but not necessarily known) timeline. You may, for example, be selling software to help with a technology migration or a construction project of some kind—one that will end definitely at some date in the future.
From an ROI modeling standpoint, it may be persuasive to show multiple views of different durations to reflect a non-fixed timeline.
What Has Changed—Key Financial Metrics
We typically calculate and present three key financial metrics when we build a business case: net present value, ROI and payback period.
In most cases and with all being equal, financial metrics tend to look more favorable to customers when selling a subscription deal structure. In particular, payback period tends to be shorter without the large, upfront purchase of most perpetual offers. NPV is typically stronger with payments pushed out to later periods. ROI, which does not take into account the time value of money, is often the same as for the equivalent perpetual deal, or perhaps slightly less favorable.
When the key financial metrics of your business case look more favorable, the customer is more likely to be convinced that your technology makes good financial sense, and is more likely to buy.
In summary, value selling in the subscriptions world is similar to building an ROI for a perpetual structure. But there are some significant differences to take into account if your value selling efforts are going to be successful.
Happy selling! As always, please let us know your questions.