Blog Entry

Jan 16
2014 

Consumption Models – New Adopters

The subscription economy has arrived and is here to stay. One of the key components of a subscription pricing model is the ability to charge against usage or essentially a pay as you go model. In the last couple of years, there has been a clear rise in the roll out of consumption based pricing models among ISV’s and SaaS providers. However, the interesting emerging trend is the adoption by OEMs, medical devices and classical hardware manufacturers who want to monetize on the software to gain a competitive advantage.

Let us examine why these traditional hardware manufacturers are moving to a pay per use model. The key among all reasons is the ability to move their client base from a CAPEX to an OPEX model. Let me explain with an example. I was talking to a medical diagnostic equipment company the other day. This company historically sells to large multi-specialty hospitals and prices each of its devices at several million dollars. The sales cycle lasts anywhere between 18 -28 months and each hospital buys up to 4 devices.  With the high market saturated, the equipment manufacturer is looking to enter other price competitive geographies and markets. One of the key business models they are adopting is to reduce the upfront cost for the hospital by leasing their equipment and charging the hospital by usage of the equipment. They forecast they can increase their revenue by adopting this model and going after a new price sensitive customer base. This core functional business model can be replicated in other ‘device + software’ industries, where the software controls the device and is transaction based.

Moving to a consumption based model is not straight forward. There are a couple of key components that are required to make this transition. First is the ability to license the software and track usage, then to feed this usage information into a billing system. This software monetization solution should have additional features and functionality over a traditional solution. It should have the ability to track true application usage across multiple dimensions including both time based and count based transaction models. The solution should not only serve as an authorization layer licensing the software but also the usage information should be tracked, measured and fed into a billing engine to move to a subscription model. This usage information may also be fed back to business and product management to give them insight into how the product is actually being used by customers. Second is the ability to invoice a customer based on this usage information, this can been done by using one of the many billing solutions available in the market today. Third, since the way revenue is recognized is significantly different from a perpetual model, it is important to choose a methodology/system that takes this difference into consideration. Finally, IT systems in their current form may not be able to, without customization, handle a transition from a perpetual license model to a subscription based license model. It is therefore important to have a road map in place to transition from a perpetual model to a subscription model.

What will be your subscription strategy?