Since the dawn of time, the established process of buying goods or services was one-time exchanges. Customers hand across the money and receive what they bought in return. This process is still the prime method today, but the introduction of the subscription service has slowly gained traction. Rather than that one-time bulk purchase, customers are now interested in pay-as-you go models.
Adrian Pearce is EMEA Principal Business Value Consultant for Licensing Solutions at Thales.
No more so is this the case with entertainment companies like Spotify and Netflix. They have shown customers are willing to pay regularly for access to content. The key is customers value the small amounts they pay to access a wide range of content, as and when they want, rather than a series of one-time payments for the latest songs or movies that come on to the platforms. While the models of these companies have been long established, many companies are now considering if their current traditional model is fit for purpose. In fact, according to IDC, an estimated 50% of all industries are expected to already be pricing and packaging their offerings as services with flexible subscription-or consumption-based pricing models.
Recurring revenue and generating insights
The benefit of licensing software in a subscription or consumption-based model is primarily in the recurring revenue that it generates. While the traditional model for many companies involves large payments upfront, this can often result in high peaks and low troughs. With subscription models, businesses can see a more consistent revenue stream coming in and over time will see a higher revenue from their customers. Consumption models work much the same, but operate on a more pay-per-use model where continual revenue amounts can go up or down.
As well as more regular revenue, for many businesses their relationship with customers is primarily one way. Businesses interact initially to sell a product, but are then unaware how, or even if, the product is used. With software licensing, businesses can maintain regular contact with customers through their payments showing their continued interest in the product, but also track how the products are being used. This insight can fuel future product development and guide businesses and what features are popular and worth investing in further moving forward.
Free to pay
Each company faces its own challenges when it comes to subscription services or licensing their software. For some, the focus may be on how to change their entire business model to a subscription service, whilst others it may be convincing customers to pay a different way or even pay at all.
Take social media companies for example. Primarily free at the point of use, the likes of Twitter via Twitter Blue and Instagram via subscriber only “Exclusive Stories” are attempting to monetize their services. While these businesses have got huge followers and interactions, convincing consumers to pay extra for new features can be challenging. Software monetization can help brands maximize the value of their offerings, but transitioning from a free model to a paid service is a challenge and requires careful planning and flexibility. If rushed or not thought through, companies risk leaving behind their customers who can’t see the value in paying for the service. Pricing strategy is so important, regardless of your existing model. Whether it be moving from free to pay, or large upfront costs to subscription, getting the approach right, but also how it’s communicated and when, is vital.
A pricing study by Simon Kucher and Partners in 2019 found that a "5% improvement in pricing without volume loss and average margins can improve profits easily by 30% to 50%". However, increasing prices can be more complex than it sounds. Companies trying to increase their prices reported they were only able to achieve 28% of the total price increase. This the lowest price increase achievement ever recorded by this study. Put simply, companies may feel the need to set subscription or consumption prices high to match the peaks they’ve had before, but customers must see the value in their offerings before they’re willing to pay. Get the pricing model right though and businesses can generate extra revenue through continually adding features on and tweaking the prices accordingly.
Technology isn’t the priority
Whether they’re already selling their services directly to customers or moving from a free to a pay model, one of the challenges once a business has decided to change becomes how to set up the right licensing program. A common mistake that many make is trying to develop their own system in house – this can waste time, money and resource and generally doesn’t deliver on today’s requirements let alone create a platform for future flexibility. The same way most companies don’t build their own Customer Relationship Management (CRM) or Enterprise Resource Planning (ERP) system, they should also invest in an entitlement and licensing solution from a partner. Licensing models can be complex to model and implement and can be costly if not set up correctly. Before deciding on the right solution partner though, it is vital that companies ensure they have the building blocks in place to take on a software licensing strategy. An effect strategy and implementation requires an approach that considers people, processes, and technology. So, what do businesses have to consider?
1. Ownership
Too often licensing ownership is considered an afterthought or an IT task. Licensing of software is becoming such a critical part of businesses that they must choose someone to lead both the initial licensing decisions, but also own it after launch. This person must understand customer needs and what’s happening in the field, to create an outstanding customer experience. If this is an individual, they need to have an eye for the commercial as well as the functional requirements. Often these people can be found in the product management side of the company.
2. It’s a team game
Software and service delivery and licensing is a team game and to work effectively, every part of the business needs to be invested. This means having representatives from each part of the business involved, from sales and operations, through to product management. Each one will be affected by a poor strategy, from sales teams losing deals to operations teams weighed down by unnecessary tasks. Before any licensing decisions are made, consult different teams to gain their perspective.
3. It’s not all about the tech
Finding a technology solution is actually the easy part. Integrating it within the business is the real challenge. Licensing teams need to focus on the commercial and operational goals and must work with teams so they feel comfortable with the solution itself and address any issues or concerns early.
4. Iterative approach
Many teams will evaluate their licensing decisions before launching a new product, but not after. Markets are constantly shifting, so software licensing is no longer a plug in and leave play anymore. Business must keep evaluating their licensing needs to remain competitive.
So, as the world increasingly moves to a subscription and consumption-based model, it’s vital that companies get on board. Whether they’re starting from scratch, looking to raise new revenue or transforming themselves completely, preparation strategy is key, both from a pricing, people and process perspective, as well as the technology.
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