| Olivier Marschalik, 15 years building revenue engines for tech, consulting at www.m0thersh1p.techAnswered Oct 3 2013 |
I have had a lot of experience on this question over the last 10 years, both as a sales/product guy and also as a sales leader and CEO. It has changed over time and will continue to do so, but here is my take on the present perpetual Vs subscription decision.
From a customer perspective both models are valid and the preference for one above the other is usually driven by:
1. Customer capability to know and measure usage (ie subscription does not systematically mean metering). For example: if you know how many hours you are going to speak on the phone and which country you are going to call, you can arbitrage between a plan and a prepaid card. Most Enterprise don’t or can’t know their current of future level of usage for for software.
2. Budget system/cycles: A very large number of Enterprise customers are allocated a fix budget and will prefer a one off payment rather than a subscription. Almost systematically true for Gov customers but also for larger accounts.
3. It is interesting to note that a few years ago studies shown customers prefered site licenses (i.e. let’s put this question to bed and get the sales guy out of my life). It was some years ago and it might have evolved but I suspect there is still a very large demand for simplicity over flexibility/exact usage price for software. I believe so because the budgeting processes have not evolved over the period.
The rule of thumb is that more flexible SMB might be more inclined to go for subscription while less agile large Enterprise might be unable or unwilling to take anything else than perpetual licenses.
> Depending on which customer type and size you are dealing with, you might need to offer both models.
From a Vendor perspective, if your customer can buy subscription, then subscription definitively makes more sense:
1. Stable cash flow instead of rolling the dice every Q
2. Constant and continuous growth that will please the board, investors and markets, rather than the Q roller coaster driven by your market seasonality or suboptimal sales team effort repartition.
3. You usually can charge more over the relationship. Customer who value the flexibility and cash flow improvement of a subscription model will pay a premium compared to a perpetual license
4. Customers have less negotiation power: the relationship usually start with a lower cash outlay and is less likely to attract purchasing department attention or intense competition. As your service and billing grow, Customers might come back to negotiate but then the fact that they will have to incur cost and risk (i.e. “switching cost”) to unplug your solution will put you in a much better negotiation position. Not mentioning that they will also have seen and measured the value you deliver before talking money (ie you and they know they need your gears).
5. You might avoid RFP because the initial transaction is below the threshold that triggers it.
There are plenty of other good reasons to favor a subscription model as a vendor. Even if some of these will disappear over time, as buyer get more sophisticated and get a better understanding of this type of negotiations.
Possibly helpful: A good resource on this to get some figures is an annual study by IDC on software licensing and pricing.