Blog Entry

Mar 5
2012 

Change is Hard, Even for Software Companies

Frequently I hear software companies talk about how they really want to be enable an “as a Service” offering, but they don’t believe they can change the buying culture of their customers to accept such an offering.  Certainly, in some cases, this is true.  But before just accepting that axiom, most companies would be well served to ask a few questions about the context.  Below is a list of a few of those questions, and why they are relevant in this scenario:

1)      Why would your customers resist the change?    There are often very valid reasons to resist change in a business model, such as the new business model representing a higher TCO or otherwise having hidden cost structures which could later come back and bite you.   Likewise, the desire to avoid another round of legal reviews can also serve as a strong motivator to stick with what you have.  But in many cases, change can be beneficial for technology consumers, and especially for those moving to SaaS as a consumption model.  Paying for only what you use is probably the most well known reason, but don’t forget others such as not needing to install and manage updates and upgrades on your machine or server, and being able (in many cases) to pay only after you use the software, not before.

 

2)      Would you consolidate your offerings?  Many software companies that have been around for a long time have offerings that are monolithic in nature.  Successful products continually get features added, and added, and added, up to a point where none of their customers are using more than 20% of the functionality.  But very importantly, that 20% may vary from customer to customer.   What if you could charge based upon the usage of each feature? Wouldn’t your customers appreciate only paying for the pieces they use?  It may even help you to successfully end of life some features that simply don’t mean enough for customers to pay for them.  Providing access to software, but providing an elastic business model that monetizes based on usage may allow separate products to be sold into the same customer, and for the same customer to use more meaningful functionality for their needs at an equivalent cost.

 

3)      How is your Sales team compensated? One of the most frequent issues that is raised in business model discussions is the behavior of the sales team.  Contrary to what many non-sales employees may believe, not all sales behaviors are based on commission alone. In many cases, the details of the variable compensation plan can have dramatic effects on the behavior of the team, but just as importantly the sales team needs to maintain its credibility with their customers.  Being able to clearly demonstrate and articulate how this can be positive for their customers is just as important as the sales person’s commission.

In most traditional software environments, large enterprise deals were highly valued and would be highly compensated due to the healthy margins and upfront cash outlay.   While it can vary significantly from company to company, this would often even happen if revenue is recognized over a longer period of time due to accounting rules.  But in a SaaS offering, you are most likely dealing with either a per user subscription (monthly or annually), or post paid usage-based revenue stream ( x number of activations during the period, or Y hours used). In either of these scenarios, there is a stream of revenue as opposed to the large one time hit that a traditional software sale may have generated.

The secret to overcoming this objection is to work with the sales management team to ensure that the sales representatives understand how they can make a similar amount of commission selling in a SaaS mode as well as in the traditional mode.  If the sales team can see it and believe it, they won’t be afraid to promote it.  But don’t underestimate the need for a sales team to be able to show their customers how this helps them as well.  If both conditions are met, it is likely that success will ensue.

 

In general, it is natural to have some concern regarding the business model changes that come with moving from on-premise software to SaaS.  However, when viewed through a couple of different lenses, most of these issues can be allayed as long as the constituent parties can see the value in making those changes.  Even software companies that may have an addiction to “the big deal” can see the value in developing a steady revenue stream from a SaaS offering.