The Pain and Pleasure of Cloud-Based Subscription Billing

Blue_CloudsEarlier this week, a group of CEOs, SVPs, technology strategists and the like gathered around a conference table in downtown San Francisco to discuss their companies’ respective experiences in switching to a subscription-based businesses. The move hasn’t always gone well with their customers or their sales staff, they openly admitted. But they argued that not only was the switch well worth it but that they increasingly had no choice. Below are some of their comments.

Mark Field, the chief technology officer of the life sciences company LifeTech, acquired earlier this year by Thermo Fisher Scientific on some of the challenges his business has endured in switching from a licensed to a subscription model: “It’s not something that’s easy to change. And as we’ve been acquired, I’m hitting all those roadblocks again. . . Our go-to-market is completely different now, and on the sales side, this is disruptive, big time. If [salespeople] just sold software, it would a licensed sell, and they’d get their commission, make their number; now it’s a subscription. It’s a smaller amount over a long period of time. [The employee] may not even be around before we start to get the full value of that subscription. So we have to think about how do we commission them. . . It’s no longer a technology system issue; it is an organizational issue.”

Field went on to add that while LifeTech may have lost 3 percent of its customers in switching to a subscription model, it has gained many more who couldn’t afford to license its technology but can afford to rent it. He also told those gathered that LifeTech has better insight into its customers than ever before. “It’s changing the way we do R&D, because we’re taking feedback from what we see customers do – which is very different from what they say what they do.”

David Wadhwani, an SVP and general manager at Adobe, on initially enraging part of its customer base by switching business models in the spring of 2013, and getting through it: “Since we announced [our subscription model], our market cap has more than doubled. A lot of this has to do with lifetime value; you have to believe in the retention rates of what you get, you have to believe in the quality of the revenue stream.”

It was important to bring Wall Street along, though, noted Wadhwani: “When we announced the transition, we pulled together between 100 and 150 analysts in New York and spent eight hours with them in what was maybe the most dense presentation we’ve ever put together. But we gave them the kind of transparency that they’ve been asking for from our users, in terms of buying patterns, in terms of average selling price by segment, so they could do the math themselves to determine whether this was a good move for us [and] whether it was accretive. We needed Wall Street to understand a different model for valuing the company; otherwise, we would have been dealing with a significantly under-valued stock price in addition to having to deal with all that transition.”

Venture capitalist Mike Volpi of Index Ventures also talked about Wall Street’s response to subscription-based businesses, noting that it’s been uneven to date: “Generally, I think Wall Street is . . .figuring out what metrics they should be looking for. Five or seven years ago, my guess is that Wall Street wouldn’t have understood this notion of a subscription at all and didn’t have the tools to measure what a good subscription business was versus a bad subscription business. Then they came to phase where any subscription business must be great, checkcheckcheck. Now we’re entering a time when investors are learning to discern between what’s good and not . . . Venture capitalists went through this three to four years ago . . . the broad investment community is coming to terms with it now.”

Not last, Karen Devine, technology strategist at Intuit, spoke at some length about Intuit’s process of switching over its business, suggesting that, like Adobe, the worst is now, hopefully, behind it.“Three years ago, we were pressured every quarter from sales to do an on-premise version of our software — [these were] million dollar deals. Fortunately, we had the fortitude to say no, because supporting each one is difficult with a cloud-based business. And [to show how much things have changed in the last year], we probably haven’t been asked about an on-site version in three or four quarters.”

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