Subscription myth busters: What it takes to shift to a recurring-revenue model for hardware and software Open interactive popup The benefits of moving to flexible subscription pricing are closer than they appear, but common misconceptions hold companies back. Downloadable Resources Article PDFKB Migrating your business from an up-front to a recurring-revenue model can seem a daunting challenge that may take years to yield benefits. High-tech vendors often embark on massive projects requiring large investments in new offerings, such as multitenant cloud solutions or managed-service ones with multiyear lead times.
By focusing only on the long term, high-tech companies miss out on an opportunity to adapt their business model quickly to the new way customers Buy CrossOver Subscription to purchase software and hardware: Stay current on your favorite topics Subscribe Satisfying latent demand for flexible subscription pricing not only allows companies to capture significant additional lifetime value from existing customers but also unlocks previously untapped customer segments, which can include business units that prefer operating rather than capital expenses or companies whose cash constraints prevent them from making big advance investments Exhibit 1.
Exhibit 1 We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: The demand for discounts on large up-front deals is rising as customers shift their software and hardware purchases from capital to operating expenses and as expectations for lower year-one costs for high-tech purchases rise.
For all these reasons, the move to a subscription business model is no longer optional for most high-tech vendors. Still, in our work with companies, we find that they often misunderstand critical aspects of the transition.
Here we dispel the five myths we observe most frequently. Myth 1: However, distinguishing between the deployment model cloud versus on premise and the business model perpetual versus subscription is critical to seizing the recurring-revenue opportunity. There is undoubtedly Buy CrossOver Subscription demand for cloud solutions in the market, and a portfolio shift toward software as a service is the right long-term strategy for most software companies.
But one particular kind of demand from customers outstrips even the demand for the cloud in most market segments: For example, we find that the preference for on-premise software subscriptions has increased to 82 percent, from 63 percent, over the past several years Exhibit 2. The simplicity and flexibility of the subscription model are Buy CrossOver Subscription main reasons cited for this shift. Exhibit 2 We strive to Buy CrossOver Subscription individuals with disabilities equal access to our website.
Finally, rolling out subscription pricing for on-premise offerings is easier than developing new cloud offerings: Myth 2: Subscription pricing is a zero-sum game between vendors and customers It may seem counterintuitive that you can increase customer lifetime value through subscription pricing. However, we have observed that there is almost always a window where the economics are favorable for both Buy CrossOver Subscription vendor and the customer.
The reason is simple: Vendors also typically experience lower discounting pressures, and that preserves long-term value. Would you like to learn more about Buy CrossOver Subscription High Tech Practice? Visit our Strategy page Myth 3: Offering both perpetual and subscription terms for the same product Buy CrossOver Subscription too complex to manage Companies executed some of the most successful transformations to the subscription model by phasing out perpetual offerings immediately or within a short time frame of six to 12 months, as Adobe and AspenTech did.
For B2B software vendors serving large enterprises, a hybrid model combining both perpetual and subscription offerings for a two- to three-year period can protect revenue and offer a safe transition. Enabling your salespeople to position the optimal offering in such a hybrid world is critical.
Myth 4: The Buy CrossOver Subscription of your transition is limited by customer appetite for subscriptions Before launching a subscription offering into the market, vendors often wonder if demand will be sufficient for a quick transition. We typically find that the three critical success factors for a fast transition to the subscription model are the ability to bear the likely short-term cash outlays and revenue declines, to operationalize subscription offerings from opportunity to Buy CrossOver Subscription, and to give your sales force real incentives to sell subscriptions.
Finally, sometimes even simple accounting issues such as vendor-specific objective-evidence treatment for licenses hold companies back from a more aggressive move into subscriptions.
Fortunately, the adoption of the new ASC accounting standard now offers a natural window of opportunity to accelerate the transition. If done right, the ramp-up can be quick: Myth 5: Your customers would never give up licenses they already own to migrate to subscriptions Buy CrossOver Subscription seems counterintuitive. Why would customers migrate their existing licenses to subscriptions?
After all, they would be returning a product they already own just to rent it back from the vendor. In fact, we find that more than half of customers are open to doing just that, that a quarter have definitely decided to do so, and that almost 15 percent are already in transition Exhibit 3. A critical element of a successful transition is rightsizing customers. Buy CrossOver Subscription the right guardrails in place, the migration benefits both the vendor and its customers and accelerates future subscription upsells and cross-sells by avoiding the complexity of a hybrid licensing contract.
Exhibit Buy CrossOver Subscription We strive to provide individuals with disabilities equal access to our website. In our work with more than a dozen software and hardware companies that made this transition during the past 12 months, we have found that five core actions are critical to success: Move Buy CrossOver Subscription into subscriptions, with ambitious adoption targets. Set your subscription price points thoughtfully to drive both adoption and lifetime value for each customer segment; protect those price points by integrating data-driven deal-pricing tools for example, dynamic deal scoring into the core commercial process.
Take a segmented approach to migrating existing customers—proactively, selectively, or reactively—and support your sales force with dedicated teams to Buy CrossOver Subscription such migrations using appropriate guardrails. Buy CrossOver Subscription the shift to a subscription business model as a cross-functional transformation affecting your full organization, including sales, marketing, services, product management, engineering, and finance.
Following these simple guidelines will put your recurring-revenue transformation on a path to success. Your customers, employees, and investors will thank you. Related Buy CrossOver Subscription.
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