A recent Gartner report said by 2020 more than 80 percent of software vendors will change their business model from traditional up-front license plus maintenance to a subscription model, regardless of whether the software resides on-premises or in the cloud. And the appeal is much broader than just software.

Subscription models have emerged across the business spectrum. This has been led by telcos simplifying their offers from per call rates to monthly allowances, and services such as Netflix, Office 365 and MyFoodBag, and all the way down to items such as razor blades, flowers and candles, available on a subscription basis.

David Gee, chief marketing officer at subscription billing pioneer Zuora, said the ‘subscription economy’ trend is being driven from the top end of town: “Unilever recently paid $1 billion to buy the Dollar Shave Club. Surf Air in California has a subscription model for flying. General Electric has moved from light bulbs to subscription services. IBM sells its Watson cognitive computing services on the subscription model.”

That’s what the vendors are selling, and why not. After all, with a subscription model, future revenue is assured and there is the opportunity to build a long-term relationship. From Gee’s point of view, too, it is also what people are willing to do with their money, as he explains: “The way people buy has changed for good; we want on-demand fulfillment and a personalised service. Sellers have to make the transition, and turn customers into subscribers.”

Quoted in the report mentioned in the opening paragraph, Laurie Wurster, Gartner research director, said pressure from cloud and commercial open source software has changed customer behaviour. “Customers have moved from buying or leasing technology, to buying IT services, to ‘buying’ long-term relationships with providers.”

More than that, she said hybrid cloud/on-premises models are rapidly becoming enterprises’ deployment model of choice, “And most software providers are becoming businesses that deploy using a cloud model.”

Making the change
While repeat- and assured revenue sounds like a great idea (and indeed it probably is), switching from previous business models of boxed software or anything else for that matter, to an ongoing subscription has implications on business systems. Being able to support the as-a-service model is not a trivial undertaking.

Gartner said the shift to subscription affects all lines of a provider’s business – product development, marketing, finance, and sales – each with disparate processes and procedures in place. And, added the researcher, selling subscription-based software requires a major overhaul of sales teams, making companies more dependent on direct sales. It also requires a major overhaul of channel strategy and delivery partners, at least in the short term.

But perhaps most notably, said Wurster, “Companies’ bottom lines are likely to suffer in the first couple of years or so due to a combination of ’deferred revenue’, and the transformation of the business without a balanced approach. The transition will also require higher levels of customer care and service.”

Self-provisioning, renewals, upgrades, online account enquiries – these are just some of the components which need to be in place to ensure customer service levels do not decline, and support costs are contained. Traditional financial accounting systems typically only have basic recurring sale functions, while custom-built software is expensive, so a new group of billing software vendors has emerged to cater to the requirements.

John Kearney, Zuora’s APAC MD, said subscriptions are growing faster than traditional channels. “This is primarily because of the increased engagement between the vendor and customer. With more regular contact, there are more opportunities to engage with customers and on-sell more products and services resulting in increased revenue per customer.”

Opportunity in the mundane
This gives rise to a situation where the apparently mundane presents an opportunity. Kearney explained: “As a result, billing becomes a competitive differentiator and a marketing tool that is a key determinant of success.”

For those looking at offering subscription pricing, Kearney advised of a necessity to become more data-centric; for example, “Many subscription services experiment with A-B pricing, as well as looking at what cookies are installed on the computers of prospects and other aspects of their online behaviour.”

Gartner’s report also highlights that product lock-in, decentralised infrastructure, complex buying and unclear SLAs in subscription models can confuse buyers. For those considering a switch to a subscription-based model, doing the groundwork to ensure these headaches aren’t created for customers is a good place to start.

Measurement of sales team performance is the other significant change needed from traditional approaches. Revenue recognition becomes a science in itself, and measures such as customer churn – the rate at which customers move on and off as subscribers –become vitally important.

“Your revenue patterns change and revenue recognition changes. You actual revenue would be hitting at the close of each month with a forward looking deferred revenue. This is what changes your revenue model,” said Kearney.

“Tying together the billing information from your subscribers with the usage information of the product or service that they’re buying, lets you create the right moment in time to potentially sell new products or services,” added Kearney. “Those insights are very helpful when planning future go-to-market strategies.”

If you’re in the market for better tooling to support your efforts, some of the leading subscription billing engine vendors are listed below.

Chances are you’ll be able to subscribe to their services pretty easily – but changing your business model and bringing your customers along for the ride could be where the difficultly lies.

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