CEO Monetization Playbook…Strategy #1: Recurring Revenue and Flexible Consumption Models

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Are you ready for THE Monetization Playbook for Software Digital Transformation?

For today’s Enterprise software companies, the question isn’t whether or not you have to shift to SaaS…it’s how. McKinsey, IDC, Gartner—they’ve all been sounding the alarm for 10 years. As Gartner has noted, by 2020, more than 80% of software vendors will change their business model from traditional license and maintenance to subscription and flexible consumption.

You know the storyline, but what you don’t know is how to navigate or adopt this trend.

That’s because, while transformation is inevitable, there are many different strategies to get you there. And not to make it even more difficult, but there’s no one-size-fits-all approach to transformation. Regardless, the pressure is on to do it right. According to research from the Forbes Global 2000, 84% fail at digital transformation—only about 1 in 8 successfully managed the process.

Any successful monetization framework has to take into consideration your particular portfolio as well as the concepts of business transformation and technology transformation. Furthermore, you have to put more emphasis than ever on the customer experience that you need to deliver because your customers have plenty of options to choose from today.

In our work with hundreds of software companies, we’ve consistently seen patterns of behavior that result in successful transformations. This led us to the realization that there’s not really a Monetization Playbook for Software Digital Transformation that enables businesses to deploy multi-pronged strategies—or at least we’ve never seen one. And this is what Enterprise software leaders need.

So we are building this monetization playbook for you, an actionable playbook to help you define the best transformation path for your organization, and the steps you need to take.

Note: these strategies are not stand-alone. In our experience, most software companies that we work with employ multiple strategies simultaneously in their ongoing shift to SaaS.

Here we start with the first and most common strategy…

Repackage to Recurring Revenue and Flexible Consumption Models: Summary

Shift existing classic “transactional” offerings towards repackaged recurring business models or flexible consumption models like usage-based, with a meaningful promise and a perception of affordability.

Conversion is typically the main play for transforming software companies: moving from traditional pricing models focused on perpetual licensing and support/maintenance models to SaaS-centric subscription pricing and pay-per-use pricing models.

Companies can go all in on this strategy or opt for a partial conversion by shifting a portion of their portfolio to SaaS-centric pricing models.

“There will still be applications on-premises, licensed in the traditional sense. But growth is in subscription and cloud offerings. This means that most of the largest software companies will be managing a hybrid scenario, from both a technology and a business model perspective — a tall order." -- Amy Konary, former program VP for Software Business Models and Monetization with IDC and current VP of Customer Business Innovation at Zuora

Customer Examples

PTC, Symantec, GE Digital, Avid, Pivotal, Sage, TIBCO, Alcatel-Lucent Enterprise, Honeywell, Schneider Electric.

Typical Use Cases

  • Address changing customer demands
  • Visibility into predictable metrics – ARR, MRR, ACV, TCV
  • Move upmarket and downmarket easily by introducing SaaS-centric pricing models

Pros

  • Increase shareholder value by providing forward-facing recurring revenue business metrics
  • Address market white space with limited investment
  • Good leverage to justify connecting associated hardware
  • Provide buying flexibility to customers and increase interaction (added flexibility makes the customer stickier)
  • Provide more predictability in metrics – ARR/MRR per product line, ACV, TCV
  • Increase opportunities to sell more products to an existing customer — land and expand model, i.e. increase growth with up-sell/cross-sell
  • Ride the wave of subscriptions with limited impact to your products
  • Easy-to-activate strategy — especially as a defensive play
The statistics vary, but more than 85 percent of software is still run on-premise through vendors like SAP and Oracle. But that’s not where the growth is. These categories are shrinking, and it’s hard to imagine that any next-generation, forward-thinking company wouldn’t think about a subscription-based model.” -- Jason Pressman, Managing Director at Shasta Ventures

Cons

  • Disruption of current business practices
  • Potential revenue decline in the short term
  • Necessary investment in new underlying technology to enable flexible pricing and packaging changes

Customer Story: PTC

PTC provides a good example of this shift in action. While PTC is one of the 50 biggest software companies, in recent years their earnings had taken a hit. In the second quarter of 2015, PTC recorded $303M in revenue. A little over a year later, that number dropped to $288M. In the same period, earnings swung from $17.4M profit to a loss of $28.5M.

To satisfy consumer demand, PTC decided to implement a broad, systemic shift to its business model from perpetual licenses to a cloud-based recurring revenue model. After implementing Zuora to build out the necessary infrastructure to support a this new model, PTC now offers subscription pricing across its entire portfolio of solutions and technology platforms. Since making the shift, customer adoption of PTC’s subscriptions have accelerated every quarter. Based on their current course and speed, by Fiscal 2021, they expect about 95% of their software revenue to be completely recurring.

Bottom Line

Repackaging and introducing pricing flexibility is a great way to revive or boost an existing product/service with low sales, low coverage, etc. You can also leverage this strategy to connect with associated hardware. You’ll just want to define a distinctive strategy per segment: transactional or recurring.

Stay tuned for monetization strategy #2…

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