Successfully transitioning your business model from “CapEx,” where customers pay up front for your solution, to an “OpEx” or subscription model where your customers pay over time and your revenue becomes ratable is not easy. And, it’s not just the transition in your revenue model that’s difficult—it’s also not simple to generate GaaP profits once you have substantially pivoted. That was the point of the last post in "The Digital Transformation Journey" series. But fortunately, with so many hardware, software, industrial and medical equipment suppliers playing today in the subscription business model, some best practices are emerging.
What Suppliers Should Do to Be Successful with XaaS Offers
Knowing what you do uniquely well and knowing what you do profitably is the first step in doing this well. That sounds easy but it’s not. Most companies are highly RFP-driven (request for proposal), meaning they let customers do all of the specifying, resulting in every solution usually being highly customized. This results in poor visibility into win/loss rates and deal-specific gross margins because every deal is different and difficult to compare. This often makes it tough to tell what you should be doing more of and what you should be doing less of. This can be death in the recurring revenue world. It can slow the date of when revenue can be recognized and can push the break-even point on the deal by months or even years. In a multi-tenant cloud SaaS offer, it will ruin the economics and productivity of your product development activity.
The first step to success in the XaaS world is knowing what you do uniquely well and know what you do profitably. - Tweet this!
Instead, what you want is to be the best in the world at creating a specific business outcome or outcomes for your customers, then convince each of your prospects of that fact. Explain why they should be relying on you to provide the RFP specs based on proven best practices. Get them to agree to adapt their business processes to ones that are working well with your other world-class customers, rather than allowing them to require you to customize your software to adapt to their antiquated, one-of-a-kind, business processes. Here are the benefits of this strategy:
- Your win rate goes up as much as 400% because you are specifying the customer’s requirement. It will map to your strengths and away from your competitors.
- Sales cycles will shorten and be less costly since your time to respond successfully to the RFP will go down.
- Your percentage of customization could drop by 200-300%.
- Time to value for that customer (and time to revenue recognition for you!) will shorten by months or even years.
- Your percentage of professional services product revenue will decrease.
- Deal margins will improve.
- It will be easier and faster to create customer success and renewal rates will improve.
- The customer will get a better and faster business outcome.
- You will have more customer references.
- You will have a more productive sales force.
Not a bad starting point!
Running The Right Plays for Profitable Subscription Offers
What’s next? Read Technology-as-a-Service Playbook. Why? Because you will learn more about all the key points in this blog, for example:
Once you know what solution you can provide uniquely well, you’ll want to cloud-enable that solution as disruptively as you can. Whether your solution is software-only or a combination of software and hardware, you need to think creatively, disruptively, and pervasively about how you can deliver the functionality remotely rather than on-premise. Firstly, it’s just a better way to develop, deliver, and maintain software. More importantly, by hosting the customer’s data and being connected to them in real-time, you can create compelling and differentiating value in many new ways that were simply impossible in your previous generation of products.
From the very beginning of the product development process, you should apply the state-of-the-art product management and pricing principles that have been developed specifically for XaaS, recurring revenue offers, which we outline in the book. These include concepts like using the Friction Curve to govern the evolution of the portfolio from initial launch through profit optimization, diversifying the revenue streams of a single solution over time, and building customer success tools into the product.
Once you know what solution you can provide uniquely well, you’ll want to cloud-enable that solution as disruptively as you can. Whether your solution is software-only or a combination of software and hardware, you need to think creatively, disruptively, and pervasively about how you can deliver the functionality remotely rather than on-premise.
Develop a clear and realistic timeline for profitability. There are so many great XaaS subscription offers that have been killed by large traditional companies because they quickly get impatient with small revenues and front-loaded cost projects. Rome wasn’t built in a day, and neither was Amazon Web Services or Salesforce.com. It’s up to product management to understand the realistic timelines, communicate them to senior management and get buy-in for realistic milestones for the offer during its life.
Where Channel Partners Come In
Think through the implications of your new offer on your existing (and future) channel partners. As Thomas and I mention in the book, the Cloud is inherently disruptive to traditionally channel-focused tech companies. SaaS wants to be a direct model more than on-premise, license software ever did. Even when it is sold by a partner, it changes the game by revealing the identity of the end customer to the OEM. No longer will the channel’s customers be a secret. Instead, every customer will be a direct and indirect customer. That worries partners.
Next, the role of the partner in creating customer value often changes. Since there are often fewer fee-based professional services required on deals, the partner makes less money, which means that you have to engineer in new ways for the partner to deliver value and derive revenue. You’ll need to architect those roles early and enable the software itself to provide partner delivery of value in ways that make it sticky to the partners. Finally, you may need new skills in your partner network. Some of the partners that got you here may not be the partners you need in a subscription-based, recurring revenue world. You may need entirely new categories of partners to really succeed at scale.
It’s a Tough Journey, but You Don’t Have to Go It Alone
As the industry re-orients itself from products to services, hard-fought lessons are emerging. Since finding and surfacing those emerging best practices are what we do for a living here at TSIA through our community, data, and outcomes, we hope you will participate in our gigantic experiment of hundreds of leading global IT, industrial, and medical device companies who agree to share what they are learning with our experts in the hopes that everyone can accelerate their road to success. It has become a must-have source of insight, especially in the wild, rapidly changing world of XaaS.
Read more posts in "The Digital Transformation Journey" series:
- "Navigating the World of Digital Transformation [Infographic]"
- "Customer Use Cases"
- "Customer Concerns About Subscriptions"
- "Supplier Benefits"
- "Supplier Challenges"
- "Growing Customers Successfully"
About the Author
J.B. Wood is president and CEO of TSIA. He is a frequent industry speaker and author of the popular books, Complexity Avalanche (2009), Consumption Economics (2011), B4B (2013), and Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business (2016), and has appeared in leading publications, such as Fortune, The New York Times, and The Wall Street Journal. He works with the world's largest technology companies on strategies to extend their innovation platform beyond the lab and into the customer experience, particularly in the age of cloud and managed services.