Wednesday, October 13, 2010

Supporting a Subscription-based Business Model

One of the most significant changes for many companies moving from on-premise to SaaS is a shift in the pricing and licensing model.  It's critical for product managers to understand the differences -- to truly incorporate these distinctions into their decision-making framework, or literally risk failure.

Typical on-premise fees are structured in a license+maintenance model, where the cost to acquire the software is high, and then there's a smaller fee that recurs annually to cover the cost of upgrades and support.  Because SaaS software solutions are a service, the fees are generally structured around an annual contract where each year the customer pays the same amount, provided that their usage is consistent.  Because the fee recurs, it is generally smaller than the up-front license fee in an on-premise model, but larger than the maintenance fees.

So what's the impact of this on PM's?  Don't we still have to satisfy the needs of the market?  Don't we need to keep our customers happy either way?  Yes, of course we do.  But it's still very important to have a crystal clear understanding of how revenue is flowing into our companies, as well as the drivers and risks associated with that revenue.  How else can we make the best decisions as custodians of the business?

As PM you should be able to build a financial model for your business, to get a feel for how money will flow in under different assumption sets, and how you'll spend the money -- just a simple P&L should give you the insight you need.  If you can't do this, you should learn how, or even just ask a Finance person to sit you down over lunch one day and help you build something that you can run with.  I suspect what you'll find is this:  in an on-premise model, new business is the life-blood of your company, but in a SaaS model, renewals quickly become the life-blood, after a few years of building a book of business.  They're both important in both models, but their relative weight is decidedly different.

Think about that -- renewals will become the life-blood, not new sales.  How does that affect how you view your investment choices as PM?  How does that impact the calculus you make when you're processing feedback from your various internal and external stakeholders?  In a SaaS/subscription world, your Sales team is still going to insist you go after things that will help them close new business -- that's how they tend to get paid, after all.  But when you model the impact of that spend, vs. fixing issues that are dragging down satisfaction levels and putting pressure on renewal rates, you're likely to find one-off deals to be of little importance.

This isn't just a shift for you as the PM, it's a shift that in a very real way re-levels the importance of different functions within the organization.  Where your hunters have previously been the main contributor of revenue, other teams (service, support, and account management functions) may now be more important.  The organizational dynamics of such a change are not trivial, and as PM's we'll be right in the thick of it, with the mission of getting everyone at the table to understand the flow of the money.  And as I said, the stakes are high -- without high levels of satisfaction and outstanding renewal rates, the SaaS/subscripton model probably isn't sustainable.  Get it right or go home.

This is hard stuff, but it's a big part of why this is the best job ever.  If you're reading this, and have made this transition, you're undoubtedly familiar with this work.  What else have you seen?  Do you have any stories to share?  Thanks, as always, for your thoughts.

All for now,


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