As discussed in last week’s post, tech companies hoping to transition successfully to SaaS delivery mechanisms and pricing models, need to carefully consider six key areas: Behavior, Customers, Metrics, Sales Compensation, and Financial model/Cashflow/Revenue recognition. In this post, we’ll look at the latter three:
Sales compensation: If a company has an existing direct or telesales organization it has to understand and design a compensation structure that will work in the new SaaS world. Salespersons accustomed to closing 100k or more on-premise software deals are not going to be enthused about closing a 10k deal. How will this play out in your sales organization?
Financial model/Cashflow/Revenue recognition: A host of issues arise with a change to a subscription-based fee model versus an on-premise model. On the positive side, a lot of the VSOE nightmare for public software companies goes away. In a monthly or yearly subscription model, it’s always clear what has been delivered, in what time frame, and when the revenue can be recognized. (Note: I am not an accountant – so please consult yours for further VSOE explanation).
On the downside, existing customers who have recently paid for a perpetual license might not be pleased. There is also an upfront trough that’s created when a company moves from monthly or quarterly big deals to a small trickle of monthly revenue recognition. In the long run, however, the company will be more profitable (provided it keeps acquiring customers and retaining them for a significant period of time). This blog post by David Skok is the best and most detailed description I have seen of the key elements of the SaaS model: CAD and LTV and the concept of the trough.
Pricing model: How will the subscription offering be priced relative to the perpetual offer? This is a key decision point. There isn’t a right or wrong answer. As noted above, it depends on the behaviors you’re trying to incent, assessment of your value relative to competitors, and what you are trying to do in the market strategically speaking.
Identifying the right model without losing market share has become a major focus. Subscription models increase dependency on renewals and risk of customer turnover, making service levels and strategic pricing two of the most crucial components of software sales cycle
Some general rules of thumb: Many software companies have priced their Subscription offers at 1/3 or ¼ of their perpetual offer, depending on what they see the average lifespan of a version of their software. It’s also important to look at the price level of the subscription offer versus what existing customers are paying for maintenance fees if you’re trying to convert existing customers. There are various tactics to influence that transition, but the price level is a critical one.
Last thought on this topic….as many who have read my other posts can attest, my experience working with high tech companies is that the design of their pricing and offerings can have a significant impact on adoption, growth and transition rates.
Two methods for effectively managing the six elements listed above are:
Identifying the right model without losing market share has become a major focus. Subscription models increase dependency on renewals and risk of customer turnover, making service levels and strategic pricing two of the most crucial components of software sales cycle
* Gartner report, Market Share Analysis: Customer relationship management software, Worldwide, 2012
