The Enterprise Shift to Subscriptions: 3 Plays for Setting Investor Expectations

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The following is excerpted from “Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business” by Thomas Lah and J.B. Wood.

Again and again we hear the same statement from executives who are facing the XaaS (technology-as-a-service) business model transformation: “Yeah, but we can’t miss the quarter.”

In other words words, they believe the expectation of investors is that despite shrinking legacy revenues and the need to stand up new offers, the company must sustain current profitability levels. Our data would say that this is a false assumption.

Investors are less concerned with sustained profitability if they believe you have a viable plan for future growth. If you are not putting a believable plan for growth, then, yes, they will most likely hold your feet to the fire on profitability.

In “Zone to Win: Organizing to Compete in an Age of Disruption,” Geoffrey Moore (author of “Crossing the Chasm”) recommends that management teams make three moves with investors during the transition. Here is our take on those three moves as it relates to XaaS:

Announce XaaS Initiatives

After you have some piloting under your belt, you’ll have a better sense of sense of what XaaS offers make sense for your company. You publicly announce your intent with these offers. You are signaling there are investments that need to be made to explore an exciting new growth opportunity. You may also announce your intent to do some strategic acquisitions to accelerate your traction in this area.

By making this first public move, you accomplish two things. First, you signal to investors that you are serious about exploring XaaS. Second, it is a defensive move against new XaaS competitors. You have some type of XaaS offer for existing customers to consider. Be loud about your plans.

Start the Clock Ticking

This is the critical step – and it is gut-check time. After continued vetting and refinement of your new XaaS offers, you let investors know that the company is serious about transforming to a XaaS business model. You set clear expectations for investors. These expectations include:

  • What will happen to revenue and operating income over the next four to eight quarters? Most likely both will go down for some period of time.
  •  What metrics are critical to watch during the transition?
  •   Number of new XaaS subscribers.
  •  Renewal rate for XaaS customers.
  • Average dollar value for XaaS contracts.
  • How long do you expect the transition to take?
    Ideally, no more than three years.
  • How will investors know the transition is complete?
  • What milestones will signal success?
  • What metrics can be used to assess success?

Declare Victory

As the key milestones of success are achieved, you let investors know…over and over. At this point in time, you should be providing complete financial transparency to investors regarding your XaaS business. The business should clearly represent 20% of more of total company revenues and be rapidly climbing. And then, of course, pop the champagne.

Look at how Adobe made these moves. Look again at how declining operating incomes and revenue growth in the short term did not adversely impact their stock price or market value.

In June 2014, Fortune published an article titled “For Adobe, Cloud Traction Leads to Record-High Stock Price.” The entire article is a supporting case study for the recommendations presented here. The following is an excerpt from the article:

“Adobe’s management team remains convinced that a bold and fast move to the cloud was the way to go. ‘Balancing the old and new restricted how much innovation we could do on the new,” Wadhwani says.

Of course educating Wall Street on the shift was another hurdle. Back in 2011 Adobe spent a few day with analysts, explaining the move to subscriptions and how that would change the model by which to value Adobe’s future growth.”

Forcing the Issue

There is one attribute of the Adobe, Intuit, and Autodesk transitions that cannot be ignored. All three of these companies forced customers into the new business model. Is this an accelerator to success? Again we are trying to go big and bold here. We believe forcing customers to your future economic model is better than straddling two economic models for an extended period.

If you don’t turn off the old options, lagging customers will linger in the old model as long as they can. Will some customers be upset about being forced into a new consumption model? Absolutely. In 2013, Adobe had to face articles and blog posts with titles like, “Why Adobe’s Subscription-Only Plan Sucks.”

But remember the comment from Adobe’s CEO: “Balancing the old and the new restricted how much innovation we could do on the new.” Bifurcating resources across two distinct business models indefinitely hinders the transition.

“Technology-as-a-Service: How to Grow A Profitable Subscription Business” by Thomas Lah and J.B. Wood is available on Amazon

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