This is Part 2 of the CEO Monetization Playbook for Digital Transformation. If you missed Strategy #1: Recurring Revenue and Flexible Consumption Models, you can read it here.
Here we dig in to Strategy #2: Product-as-a-Service.
As Fast Company recently noted: “Some companies know that products only get you so far, that services are the future—in fact, services already account for 75% of the global economy.”
For quite a few years now, we’ve been software businesses—from Adobe to PTC—moving away from one-off products and into SaaS business models to increase agility, revenue, and shareholder value and ward off competition from nimbler startups.
For examples of companies that understand the changes underway and that are successfully making the shift, you need look no further than the current PwC Global 100 Software Leaders report that ranks SaaS and PaaS revenue for the top 50 companies, and the percentage each segment comprises of overall software revenue.
Among the top 20 companies, the list of SaaS standouts includes:
• Intuit (#10) with 46% of revenues from SaaS;
• Adobe (#11) with 23% of revenues;
• Cisco Systems (#14) with 35%;
• Citrix (#19) with 27%.
But, increasingly, the trend towards as-a-service is picking up steam and crossing industries. Just look at a company like Philips which makes thousands of products, but now refers to themselves as “a technology solutions partner.”
By selling a service as opposed to a product, businesses shift not only their financial model, but the value of their offering. Product-as-a-service is a customer-centric model where customers subscribe for the time, usage, or outcome of the product—rather than simply purchasing a product outright as a one-time transaction. The shift for consumers is from an upfront price to usage-based pricing in which price is aligned with use, i.e. value-based pricing.
It’s all about access, outcomes, and experience—not product ownership. This shift creates opportunities for businesses to build ongoing, meaningful relationships with customers that they can continue to monetize over time.
“With even large, established companies seeing revenues fall as a result of startups taking advantage of new technology, it's more important than ever that savvy business owners start looking into whether the "as a service" model could be applied to their own industries.” - Deloitte
NCR, Alcatel-Lucent, Husqvarna, SmartCap, Barco, EDF, Vivint, Symantec.
▪ Device-as-a-Service (IoT)
▪ Disruptive model to enable upstream and downstream sales flexibility
▪ Provides competitive advantage with smaller and nimbler start-ups
▪ Very high stickiness for consumers because of perceived value (i.e. outcome-based pricing: paying for the services/outcome/access you need)
▪ Creates new revenue stream due to multiple ways of monetizing products while leveraging existing hardware (usage/consumption and subscription models)
▪ Increased upsell and cross-sell opportunities
▪ Creates additional feature capabilities and introduces additional revenue opportunities
▪ Visibility into predictive product metrics due to recurring nature of business (e.g. product adoption, ASP, MRR, ARR, CLTV, ARPU, Churn)
▪ Requires an upfront capital investment
▪ Lack of initial visibility into success and revenues of product-as-a-service offering
▪ Paradigm shift due to complexity in product-related metrics (e.g. product adoption, ASP, MRR, ARR, CLTV, ARPU, Churn)
▪ Ongoing buyer-seller relationships require greater customer support which may require the build-out of a new customer success function
Symantec is the global leader in cyber security, with $4B in revenue. Facing revenue decline and growing competition in the security space from nimble SaaS startups, Symantec knew they needed to transform into a security-as-a-service provider, with the necessary infrastructure to support this shift. With Zuora Central acting as “the heart” of their global subscription platform, they were able to successfully make the transformation from license to subscription.
They reduced multiple ERPs down to one consolidated platform and provisioning down from 21 days to 5-10 minutes. And they saw 28% YoY growth growth in GAAP revenue in 2017 and 35% growth in non-GAAP revenue.
“You call Zuora the hub, I call Zuora the heart. It's the heart of the platform because it holds all the intelligence around the billing and the subscriptions. It's the heart that ties it all together.” - Sheila Jordan, CIO, Symantec
Shifting to an as-a-service model is a highly disruptive strategy that enables new monetization streams. With more flexibility in a service offering, as-a-service provides the foundation for a much stickier customer experience while also empowering companies to acquire more and more customers.
Once you pivot to as-a-service, businesses begin to measure profits in new ways, with new metrics. This is a paradigm shift that can be challenging to undertake, but ultimately this insight into more predictable business metrics consistently leads to higher valuation caps, and therefore higher shareholder value.