Technology companies and their channel partners are undergoing a massive transition from traditional license and maintenance business models to cloud subscription and consumption usage. This shift is driven by a range of market factors: from customers' adoption of the cloud, to demand for faster time to value, the desire for minimal upfront commitment and investment, and the flexibility to scale services up and down as needed.
Converting business models to cloud consumption is a huge undertaking that can completely upend software reseller revenue streams, profit margins, and sales/marketing strategies. Understandably, there has been a lot of resistance to transitioning to the cloud.
However, the industry is in agreement that the cloud is the future of IT delivery. Sal Patalano, vice president of global marketing, partners, and channels at CA Technologies has said, "Like it or not—and I want to emphasize that—like it or not, [the cloud] is where we're going, folks." (And that was back in 2014.)
A recent survey by Gartner showed that alternative consumption models (e.g. SaaS, hosted license, on-premises subscriptions, and open source) represent more than 50 percent of new software implementations. In fact, Gartner is predicting that by 2020, more than 80 percent of software vendors will change their business model from traditional license and maintenance to subscription.
What are Cloud Subscription and Consumption Models?
We've been talking about this topic for some time, but let's review what these new models are and why the industry is undertaking this change.
While traditional software licenses are purchased as one-time payments either for an annual or perpetual license and with or without maintenance included, in a subscription model, users are charged at a fixed monthly rate (which can also be paid quarterly or annually) that typically includes maintenance and usually does not require the implementation of software at the customer.
Similarly, consumption models are calculated as monthly payments but instead of a fixed rate, they can vary month-to-month based on the number or level of services the customer consumes.
Both of these new models offer noteworthy benefits for customers and providers, including:
- quicker time to value by removing up-front implementation requirements
- seamless and more frequent software updates
- the flexibility to scale up and down as needed
- perception of affordability and minimized upfront risk that can ease the initial sales process
Additionally, fixed-rate subscriptions enable easier budgeting (for customers) and predictable, recurring revenue streams (for providers), while consumption models offer customers the justification of "only paying for what we use."
What Does this Transition Mean for You?
One of the prime reasons there has been significant channel resistance to this change is that the transition from up-front product purchases to monthly subscriptions is creating havoc for channel partners' revenue streams. Bottom lines are suffering and, while the change will be a positive one in the long run with potential for larger customer lifetime revenues, the short-term revenue loss during the first few years of this transition can be difficult to manage—especially if costs are not reduced or reallocated. In fact, Bain and Company says that "it usually takes three to four years to break even."
The winners in the race to adapt to this new paradigm among the channel will be those companies that can:
- Step up their customer care and service to build long-term, mutually-beneficial relationships with their customer base;
- Manage their short- and medium-term expenses (e.g. salaries, operational expenses, and gross margins) while adjusting to these new models; and
- Strengthen their own brand identity by specializing or offering more extensions and service offerings.
To remain competitive, you need to make a move to the cloud sooner rather than later. In 2013, only 40% of channel partners were successful in selling cloud services, whereas in 2015, the number jumped to 63%.
How Can a Software Reseller Successfully Move to the Cloud?
While successfully navigating the transition to cloud subscription and/or a consumption-based model are more in-depth that we can cover in one blog post (and affect all areas of a company's business, from marketing and sales to finance, HR, and operations), I'll mention a few strategies that a software reseller should consider:
- Demonstrate Business Value: Shift marketing messaging from technical capabilities to the market value and bottom-line impact for the customer.
- Change the Focus for Sales and Customer Service: These teams need to be overhauled with a new focus on building ongoing relationships with customers rather than relying on periodic sales. Hire new staff who have expertise in digital delivery, and retrain existing staff to boost their expertise in cloud and managed services so they can clearly communicate the benefits to customers.
- Reassess Vendor Partners: A software reseller should reassess their partnerships and focus on teaming with vendors who are making it easier for their channel partners to be successful with subscription and/or consumption models.
- Put Customer Data to Use: Implement ways to aggregate and analyze customer data to better understand what those customers want and need and how to continuously improve their experience.
We've put together an eBook guide to help you make the transition to cloud subscription and consumption-based models. Download the PDF for more strategies and insight into how this change will impact the industry and software reseller businesses.