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Is Subscription Billing the holy grail for business software vendors and what does it really mean?

Subscription BillingSubscription has become synonymous with SaaS (or hosted) solutions. There is however also a move to provide subscription options for on-premise and traditionally licensed products. While these have carried annual fees in the past under the banner of "Annual Maintenance Fees" or "Annual Upgrade Protection", a range of subscription options are starting to be offered which essentially include both the annual fees and the purchase of the license but leaving the current status quo of deployment in place.

In both cases there are many reasons why subscriptions make good business sense such as predictive revenue streams, better cash flow, fewer highs and lows in the analyst forecast charts for vendors and from the customers perspective, being able to spread his cash flow over time are a few of the financial benefits.

So how is this all tracking in the market ...

For small business software vendors such as Intuit, Wave Accounting, Xero, MYOB and others, the answer is GREAT !!

The uptake of these products has been exceptional and continues to enjoy strong growth in user numbers ... although it should be noted that profits are not nearly as impressive as one might believe.

However, in contrast to this, for vendors providing solutions to medium sized and larger enterprises such as Microsoft, Sage, SAP and Infor the picture is nowhere near as stellar either in the uptake of SaaS solutions or in the sale of license subscription plans.

Some of the reasons for this include ...

  • The businesses using this software need more complex solutions and generally fall out of the box of being able to use an off-the-shelf SaaS solution.
  • Resellers and ISVs do not have the benefit of scale to absorb the cash flow and revenue effects on their current business models brought about by a transition to a subscription based model and are seriously concerned about how it will affect them. Neither them nor their vendor partners have the necessary systems to manage these new models to ensure revenue participation, client ownership, etc. As such they are skeptical about the change and are reluctant to push the model into their markets.
  • There is a massive installed base of legacy systems and these will stay for a long time to come. These are unlikely to change in any great rush and accounts for a substantial part of the current revenue streams of the software vendors. They will need to continue to service their customers by the current models which in turn contradict with the roll out of subscription models.

It is however inevitable that over time the go-to-market, deployment and pricing models will change but to continue to deliver enhanced functionality and high levels of local services, it is essential that the vendor keep their current ecosystem of value added resellers and independent software vendors ("ISVs") engaged. Were this not to happen, the vendor's business could be substantially negatively affected.

To deliver new models and at the same time deliver a consistent experience for the customer and keep the ecosystem fully engaged is going to add substantial demands on the models and systems used by software vendors as their legacy models and systems do not have what is needed to achieve this.

To cater for this, the next big thing for business software vendors to come to market will be the availability of Ecosystem Management Platforms ("EMP").

Unlike the current crop of disparate systems that software vendors hobble together to create islands of solutions in their organizations, these new EMP solutions take a completely different and more holistic approach to the business by providing a tool that manages multi-channel sales models, caters for a diverse ecosystem, deploys multiple licensing models, integrates e-commerce, drives new sales through complex marketing and analytics tools, manages their global skill availability and this is all provided in a single cohesive package.

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