Selling Software Subscriptions

Most folks don’t buy a house by writing a single cheque upfront; monthly instalments are the usual way to make major purchases affordable.

Good news: You can expect vendors of enterprise software applications to catch on to this business basic, according to industry analysts at AMR Research in Boston. Enterprise applications include enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM) and e-business software (no acronym yet). AMR vice-president David Caruso says that over the next two to three years, makers of this kind of big-ticket software will move from requiring multimillion-dollar cheques upfront to offering subscription-based pricing.

Customers will still have the option of installing and hosting the software on their own systems, so this pricing model is different from outsourcing to an application service provider. The subscription plan will allow customers to smooth out their expenses and also add or subtract seats without major contract renegotiations, making the software expense more variable depending on the health of their business. Close or spin off a division? The number of seats, and therefore the monthly fee, goes down. Grow like Topsy? Simply raise the fee as seats are added.

“From a businessman’s standpoint, spreading out payments always sounds good,” Caruso says.

Unfortunately for the vendors, they may have to suffer slings and arrows on the stock market in the transition. Caruso notes that Baan – no stellar performer on Nasdaq anyway – took extra lumps at the end of last year when the company announced a move toward the subscription pricing model. The problem is the old hockey stick model: Enterprise software vendors typically record the great bulk of their revenues in deals signed right before the end of each fiscal quarter – buyers are habituated to wait until then to get discounts. Since the vendors can’t legally record revenue until they’ve delivered the service, the subscription model means revenue from big, new licensing deals will largely be deferred. Ultimately that will stabilize revenues for the vendors, but in the near term revenues may appear to dip somewhat.

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