The migration to subscription-based licensing agreements is well underway in the software industry. An increasing amount of work is moving to the cloud, accelerating the acceptability of software taking the form of applications provided, hosted, and maintained directly by vendors.
This development is pushing the software as a service (SaaS) model more directly to the forefront of industry trends. However, vendors should not feel compelled to blindly go all-in on the SaaS bandwagon.
The marketplace will continue to evolve, but customer needs remain the most important consideration when offering solutions. This requires vendors to consider how customers use applications, the existing investments already in place, and the customer’s present and future requirements. Understanding this entire set of needs will lay the foundation for a framework that makes the sales cycle easier.
Breaking Down the Rhetoric
There are two separate trends that can potentially spark confusion:
- The proliferation “as-a-service” offerings taking place (SaaS, PaaS, IaaS)
- The shift toward a recurring-revenue framework in the software industry
These two trends often work in concert to simplify several aspects of the vendor-client relationship. But it is important that “subscription” and “services” are not interchangeable or synonymous concepts leading to an inevitable universal strategy.
It is important to define exactly how SaaS and subscriptions interact while remaining separate tools in a provider’s list of solutions. It is equally important to consider what the optimal options are for different software companies.
To be sure, most software licenses are now being sold exclusively as subscriptions or with a subscription option. The perpetual license model where a user pays once for lifetime use, meanwhile, is in a state of continuous decline. The most common offering for B2B applications is the cloud-based, single- or multi-tenant subscription model, and can be advertised as a service.
SaaS is an offering, where a vendor provides a capability offered by its software and charges the customer for that capability, rather than selling the software itself. Subscriptions require the user to surrender the right to use the software perpetually.
Software can be sold as a subscription even if not part of a SaaS offering or hosted on the cloud. Software licenses, for instance, can be installed on premise but paid on a recurring subscription. The vendor takes care of maintenance, upgrades, security patches, and other issues as part of the agreement, but the timetable of these agreements looks different than SaaS.
The Power of Flexibility
An important cog in any subscription strategy is flexibility. These agreements can be structured as yearly payments, or alternatively paid up-front for multiple years under terms that resemble the cashflow structure of a traditional perpetual deal.
As attractive as cloud services are, most companies are unlikely to move to a 100% cloud model. Customized legacy apps, security considerations, deployment strategies, and latency requirements may limit decommissioning of on-premise hardware. The gravitation towards a hybrid solution would require buyers and vendors to consider subscription offerings that are functional outside the traditional cloud environment.
Vision for the future
Aligning a subscription agreement with the assumption that it is also a SaaS offering could limit the scope of the relationship. If customers need an on-premise or a hybrid of dedicated single-tenant options and multi-tenant options, the vendor needs to provide latitude for various scenarios.
Offering various options under the subscription umbrella could require more creativity and upfront work but will likely increase customer satisfaction, strengthen relationships, and reduce attrition. Software vendors need to continue measuring long-term customer lifecycle value through the lens of a positive impact on gross retention rate (GRR) and net retention rate (NRR), which does include upselling and cross-selling.
Although SaaS market is expected to continue its aggressive growth for most of the upcoming decade, subscription offerings from vendors would enable the transition of both large and small enterprises to a hybrid model in the new digital era.