It's a huge issue as software companies move from an all-upfront-charge model to subscriptions in the cloud. Has the last shoe dropped now that data analytics provider Tableau decided to push subscriptions for smoother sales? What must other cloud firms know about subscription revenue models before they go from shrinkwrap to fill-in-the-blank-as-a-service?

“Migration to a subscription model is as inevitable as the move to the cloud,” Peter Merkulov, vice president, product strategy and technology alliances, Globalscape, a data exchange provider says. “It might be happening slower in some software segments, but it is happening. It brings obvious challenges, such as different revenue recognition models, different commission structures for sales and new arrangements with channel partners.”

Applications as diverse as infrastructure, office suites, accounting, recruitmentartificial intelligence and others have or are considering the move. Some even changed from charging by the seat to a blanket enterprise licensing subscription model. Talkin' Cloud takes a snapshot of the state of the cloud subscription model.

How Tableau Changed to a Subscription Model

Before you reject the notion that moving to cloud subscription model is difficult and that any entry-level hire would know how to do it, consider the experience of Tableau itself. The company's CEO, Adam Selipsky, went on what you could call a “listening tour” of its customers to find out why they had stopped or slowed their buying. It decided to examine its best practices and increase the number of options for getting from marketing to sold. And in the process enabled customer expansion and the next generation of innovators.

“Over the past two years, we’ve seen a change in how people want to license and adopt technology,” says Dan Kogan, director, market intelligence, Tableau. “Customers have been asking for an easier, more flexible way to bring analytics to everyone in their organization more aligned to the way they purchase SaaS and cloud software.”

Moving from a perpetual license to a subscription model, Tableau had three outcomes in mind: give customers more budget flexibility, reduce product risk and more closely harmonize corporate innovation efforts with the customer experience.

“Overall, we believe moving to subscription benefits all our stakeholders and will help sharpen our commitment to customers,” Kogan says. “It makes sure that our customers are satisfied with their experience and that we’re continuing to innovate in order to bring new capabilities to the marketplace.”

SaaS Product Must be Better, Salespeople Must Change

Before any company contemplates switching from the all-at-once way of recording software sales to the subscription model, it must first make sure that its SaaS product is up to snuff and its salesforce is up to the task. Disk-based software offers a consistent customer experience that the SaaS alternative must surpass in order to induce many legacy business customers to upgrade. And business development representatives used to going after big deals may not have the skills or enthusiasm to transfer to the smaller, more regular sums at the heart of the subscription business. For those that do, the commission methodology needs addressing and some retraining could be in order.

“The very shrewd notice the difficulty of transitioning from disk licenses to SaaS subscriptions,” says Gwen Cheni, portfolio manager and partner at a San Francisco hedge fund. “Adobe was able to do this successfully, Microsoft with a few hiccups and most security companies. From what I've observed the last seven years, the difference between the ones that have been successful in SaaS transition and those who are struggling lies in sales and SaaS product quality.”

According to Cheni, a SaaS subscription sales team fundamentally differs from a disk license sales team, and tech company CEOs need to recognize this prior to the transition and change compensation structure in parallel. In addition, the SaaS product must be better than the disk product to incentivize current disk customers to transition.

“You get the performance you incentivize,” Cheni says.“The combination of this push and pull—plus patience—is what separates successful transitions from those that struggle.”

Regular Cash Flow Transformed this Company

Sometimes, moving to a cloud-based subscription model may not be a case of it's a customer preference or something that just requires a few adjustments on the part of company personnel. It could be a matter of survival of the business. In a software sales model dependent on physical media and hardware, associated large lump sums can become so irregular as to put the company in a cash crunch. That was the experience of BookingLive, a provider of cloud-based booking system software.

“When we set up BookingLive we provided a service, creating bespoke booking systems for clients—and if materials were delivered, we would hand over those on a CD/DVD—a totally unsustainable business model,” says Vinnie Morgan, CEO, BookingLive. “Some months we were inundated with work; some months we did not have enough. Keeping the cash flow consistent was a huge challenge, and we were very vulnerable to late payments and bad debt. If a client decided not to pay us or became insolvent, we were left holding the bag.”

To smooth out the cash flow, BookingLive determined that by moving to a cloud-based subscription model it would be able to transform from a company that provides a service into one that provides a product. The company still offers bespoke features to customers when necessary, according to Morgan, but a subscription model exposes BookingLive to much less risk from late payments and bad debt while giving it a consistent cash flow to plan around.

Another feature BookingLive has been able to take advantage of due to a subscription business model is automated billing, which gives it real-time revenue analytics. KPIs based on green, yellow and red tell Morgan how an account is performing.

“When an account slips from green to yellow, I am alerted and able to rectify the situation immediately,” Morgan says. “This is only possible with the consistent revenue stream we get from a cloud-based subscription model. Under our old system, with revenue coming in erratically and unreliably, there was no way to keep real-time stats on profitability.”

Reinvent the Company to Move from On-premises

In addition to a move to a subscription business model, some companies had to change from an predominantly on-premises hardware strategy to an in-the-cloud app approach. Such a company was Lifesize, the high-definition videoconferencing provider. When it started in 2003, the company was the first with high-definition video solutions for business and business boomed, according to Lifesize. But by 2012, while it was building dedicated appliances and servers for its data centers, competitors were pursuing innovation management of flexible SaaS videoconferencing.

“After years of smooth sailing, our ship was going down, and it became clear the only way to survive was to reinvent Lifesize as a cloud-based conferencing company,” says Craig Malloy, CEO, Lifesize. “We overhauled our product offering and underwent significant restructuring.”

With the rapid of the SaaS market, many channel resellers and distributors were caught in a bind, Malloy feels. But with the high gross margins of on-premises equipment, they were reluctant to give that up. However, a limited addressable market for on premises videoconferencing has forced their hands. And while the high upfront fees may longer be there, in the end the SaaS subscription model allows the channel to market to a hundred times the number of customers, according to Malloy.

“Reinventing a company involves a tremendous test of faith and commitment,” Malloy says. “It was the most intense experience of my career—exciting and challenging in equal measure. Don’t rush into it and make sure you’ve thought through the roadmap to your destination. Take time to understand your objectives, rally your team and continue to move forward without reserve.”

Final Important Points in Moving to Subscription Model

In closing, there are a few important points for a any cloud company to consider in moving to the subscription model. According to Merkulov of Globalscape, this is his vendor's subscription checklist:

  • Migration of existing perpetual licenses might not be quick and easy—a lot of customers feel that if they have already paid for software, they might not want to do it again
  • Consider the specific software lifecycle and offer migration during the appropriate renewal or update cycle
  • Might make more sense to offer cloud and subscription models for new projects
  • Important to offer the right options for subscription length—subscription means recurring, but nobody said it needs to be a month; it can be a year or more, or it could be shorter
  • Most customers look to subscription-based models because those allow a move to opex model instead of capex, and they always appreciate not paying for what they don’t use
  • Look at moving to subscription as an opportunity to rethink pricing models and better align those with customer perceived value

“With a subscription model, you don’t have to worry about your software being pirated,” Merkulov says. “Recurring revenue opens opportunities to accelerate growth and new segments because subscription and consumption based models allow to you to make feature-rich, high-value software affordable for SMBs, without discounting and devaluing it.”