Subscription-Based Transformation: Four Keys to Selling Software as Service

Momentum continues to build for the software-as-service model, with Fortune magazine, among others, recently citing this approach as one of the five biggest trends in technology. Some software firms have begun to gain traction with this approach, but many others are struggling with the difficult realities of successfully marketing, selling, and delivering subscription-based offers.

Proponents of the model promise numerous benefits to customers, including faster implementation of enterprise applications, controlled costs, and reduced risks. As such, they hope to acquire new accounts, especially small to midsize companies that don’t have the infrastructure to support the most sophisticated applications internally. Proponents also look to increase average revenue per existing account and to make switching to a competitor less likely.

Yet many customers see only new tactics to lock them into longer-term deals and increase overall spending. Persuading the skeptics may require more substantial organizational change than first seems necessary.

Too often, subscription offers are essentially just a financial façade for the same old products or a superficial combination of products and services that are not effectively integrated. To truly create the value that will make these programs sell into the mainstream, vendors need to do four things:

• Understand customers’ business. Selling and providing subscription-based solutions will require vendors to dig deeper into their customers’ business models and operations. For example, crafting an effective value proposition could require modeling and comparing customers’ life-cycle costs of software ownership. This, in turn, means understanding customer use models and the challenges that arise over time that cause the most cost, resource drain, and frustration.

• Improve customer relationships. Subscription-based solutions change transaction sales into ongoing relationships. This is a big change especially for the smaller and midsize accounts that have often received little day-to-day care and feeding. If managed well, the new relationships create opportunity for further product penetration, higher referral rates, and reduced switching. But the key is making the user experience a positive one. This requires a clear value proposition, well-designed services, and the elimination of frustrating surprises such as hidden fees.

• Integrate disparate organizations. Providing sophisticated subscription services typically relies on seamless integration of multiple organizations. Managing this integration with internal groups such as product development, consulting, customer service, IT operations, and administration—and sometimes partners as well—requires substantial planning, skill, and organizational alignment. Most important are clear agreements on the definition of the offer and specific deliverables, quality measurement and control, and accountability.

• Facilitate business process innovation. Vendors need to emphasize innovation in business process as much as technical advancement. Over time, the key to success with the software a service model will be the degree to which particular offers and solutions continually improve customers’ business operations, expand opportunities to grow revenue, and reduce risk and aggravation.

These changes are not trivial. They require a shift in focus from helping customers understand the promise of new technology to meeting customers’ business needs. Subscription-based solutions and similar models will likely enter the portfolios of most large software firms. Their prospects for success, however, will depend heavily on their ability to prioritize the four customer-centric initiatives described here and integrate them into corporate culture.

And who knows—as subscription revenue increases and competitive advantages become more visible, even Wall Street may start valuing the services side of the software business.

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