Why have software companies like Adobe, PTC, Symantec, Sage, VMWare and countless others made the shift from traditional license and maintenance to subscription?
Because they can’t afford not to.
As Deloitte spells out: “As more and more customers demand more flexible payment models, the continued viability of many companies, and even entire industries, is being threatened. Those that fail to at least explore consumption-based offerings may end up on the path to obsolescence.”
In working with hundreds of large enterprises in my role as Regional Vice President of Sales, North America for Zuora, I’ve repeatedly seen three key drivers that lead software companies to transform their businesses.
This is the key driver right here: predictable, high-margin, recurring revenue that is highly attractive to investors and shareholders.
It comes down to a couple of core metrics.
While companies that shift to a recurring revenue model may see an initial downturn in gross margins, over time the increase to shareholder value is huge as investors gain confidence in the predictability and increased revenue growth opportunities of a recurring revenue model.
For example, look at software giant PTC. When PTC announced a broad, systemic shift from perpetual licenses to cloud-based subscriptions, they predicted that this would rekindle growth, expand margins, and maximize long-term shareholder value. And they were right! As of today, their stock is up 85% year-over-year (from March 2016) and they’ve added more than $3 billion dollars in shareholder value. Their perpetual revenues got impacted, but it’s made up for in recurring revenues—and the stock price reflects this.
Today SaaS companies are disrupting large players and established markets. The pivot to the cloud throughout the software industry has created new competitors and increased customer expectations. SaaS businesses can quickly out-compete via new business models that enable improved experience (price, quality, and/or speed).
As a result, software perpetual license and maintenance revenues are slowing or in decline. Gone are the days when customers want to buy software in a box. Customers now expect a software-as-a-service experience that provides ongoing and increasing value throughout their time as a customer.
Symantec provides a great example of a software business that chose to be the disruptor…rather than get disrupted by new, up-and-coming, mid-sized and small-sized cybersecurity software vendors. In late 2015, they dove into the threat market with a new security-as-a-service offering leveraging other solutions from the Symantec portfolio to create a single integrated solution that competing product just can’t measure up against.
Gartner predicts that by 2020, more than 80% of software providers will have shifted to subscription-based business models. Buyers are demanding it, as PTC discovered through their own due diligence: according to PTC CFO, Andy Miller, “In our research, we found that up to 90% of current and potential customers want more flexible pricing options.”
Customers prefer subscriptions because: