Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved. Going Hybrid with SaaS: Managing Perpetual and Subscription Businesses In the Same Chassis Going Hybrid with SaaS: Managing Perpetual and Subscription Businesses In the Same Chassis Robert Mahowald Director, Worldwide Software-As-A-Service (SaaS) Research Program IDC Amy Konary Director, Worldwide Software Pricing & Licensing Research Program IDC an IDC Breakfast Briefing June 2009
Going Hybrid with SaaS, Managing Perpetual and Subscription Businesses in the same Chassis
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Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved.
Going Hybrid with SaaS:Managing Perpetual and Subscription Businesses In the Same Chassis
Going Hybrid with SaaS:Managing Perpetual and Subscription Businesses In the Same Chassis
Robert Mahowald
Director, Worldwide Software-As-A-Service (SaaS) Research Program
IDC
Amy Konary
Director, Worldwide Software Pricing & Licensing Research Program
Will All of This Normalize Pricing?Will All of This Normalize Pricing?
What is Normal?
• High, up-front license costs followed by a large, ongoing maintenance fee• Customers that feel bullied into buying via aggressive sales techniques• A software value disconnect
Will All of This Normalize Pricing?Will All of This Normalize Pricing?
What is Normal?
• High, up-front license costs followed by a large, ongoing maintenance fee• Customers that feel bullied into buying via aggressive sales techniques• A software value disconnectWhy Be
Of the top 100 software vendors worldwide by revenue, 40% report subscription revenues
For 13% of the top 100, subscription represents greater than 50% of total software revenues
Salesforce.com is the only pure-play SaaS provider to make it into the top 10 vendors according to software subscription revenue
Projected growth in SaaS impacts the subscription forecast, with SaaS-revenues making up 32% of the overall subscription forecast in 2008 and 33% in 2009.
2009 Spending on SaaS (est $9.5B WW) is YoY growth of 42% vs. All software: (3.4%) vs. All Applications (5.6%)
Vendors• Competitive push• Customer pull• New market opportunity (72% said
they would look to an existing vendor first when sourcing a new application)
• Growth within existing customers• GROWING PAINS
Why Go Hybrid?Why Go Hybrid?
Customers• Addresses needs today: TTV• Provides new sourcing options from trusted vendor• Change their IT posture (cost center to service center, situationSaaS to transformational…
• Buyers want choice: 74% of IT respondents (85% of LoB ) saidSaaS provided important new sourcing and pricing options
• Buyers want guidance: Alternative sourcing vs. transformational (10% vs. 100%)
Q: My organization is open to buying from a small firm with a very short track record, if the price is good and functionality seems at least comparable- %Agree
Source: IDC Survey of Software Pricing, April 2009, n=185
CompanySize
Title
Type
• Customers willing to take a risk provided there are savings built-in…• Approximately 65% of net new applications offerings WW in 2008 were subscription-based SaaS offerings (whether hybrid or pure SaaS)• If priced and marketed correctly, very small ISVs can look larger than they are…
Small ISVs Have a Fighting Chance with HybridSmall ISVs Have a Fighting Chance with Hybrid
What Are Key Vendors Doing?What Are Key Vendors Doing?
PaaS and Cloud-Scale Providers
Traditional ISVs
SaaS Providers
EMC/MozyHPSymantecAdobeSungardIBMMicrosoftSaS
WorkdayTaleoConcurRightNow
SalesForceAmazonGoogle
“We care about scale and subscribers” Low cost for entry, but we’d like you to stay awhile…”
“We don’t have legacy perpetual license issues, and we understand we might hit a ceiling as we scale from SMB and mid-market into enterprise – what’s the right model?”
“We have established brand, customers, and channels… Are these assets or liabilities?”
Hybrid: A Bipolar Business CultureHybrid: A Bipolar Business Culture
“Our perpetual business is driven by elephant hunter DNA: hunt the biggest animals, figure out what to do later.”
“In our subscription business, we start small and expand over time. We are focused on making sure we live up to our commitments because if we don’t, we’ll never get the renewal business.”
Source: Interview of software publisher on managing hybrid perpetual, subscription businesses, 2009
Building A Hybrid Business: SellingBuilding A Hybrid Business: Selling
Sales Approach is “Always Be Selling”“Software” means large up front investment in both license and hardware
Requires consultative and solution-selling approach, not IT-centric
SaaS is fee/consumption-based, no hardware, and requires accelerated sales techniques
– Lower hurdle to acquire customers, greater emphasis on customer retention,upsell, cross-sell
Ordering and billing infrastructure “Software” ordering, provisioning and billing process is not automated
– Means long sales cycle; one-time, up-front billing
SaaS ordering, provisioning and billing process done in real-time– Customers want to evaluate, purchase & provision online or telephone sale
Sales compensationSaaS is low price-point, high volume. Typically sales execs paid for up-front license revenue, not recurring annuity stream: the SaaS job is not over when the contract is signed…
• Predictability – yours and theirs. You want a consistent COGS and recurring revenue, and they want cost smoothing over time.
• Set-up Fees - How much will implementation slow down the sales process? What is reasonable and how does this influence the monthly recurring prices? Goal: remove barriers to quickly get customer to VALUE
• Minimums – Several SaaS vendors employ a usage-based pricing similar to usage tiers on cell phone plans -- in these cases the vendors choose to decrease implementation fees in order to get higher minimums
• Contract Length – Our survey data point to an expectation that price/user or cost for add-ons will be lowered or at least more negotiable with a longer-term commitment: 3 years is the norm to secure that break
• Differential price – An advantage of established vendors with mature brands, not value-based or cost-plus: eg. Microsoft Exchange vs. BPOS
Building A Hybrid Business: PricingBuilding A Hybrid Business: Pricing
• Keep it simple & start small
•Take a portfolio approach
• 3-4 year break-even• Combine RTU, maintenance, (and hosting) in one price• Set sales compensation to neutral • Offer annual contract, with discounts for longer terms
• Consider the channel impact
• Bracket by customer size• Create a “lite” product forSaaS/subscription•Assume your hunters will sellSaaS/subscription• Over-protect against cannibalization
What’s Next and Essential GuidanceWhat’s Next and Essential Guidance
• SaaS is not a fleeting trend, and it’s important to build a hybrid company: Vendors cannot safely orient themselves around a perpetual model any longer, and expect to gain share (no matter what the economic climate)
• Reorganize your company’s culture into a hunter/gatherer approach or a dual/hybrid distribution and selling model