Let’s look at two ways to provide software solutions (followed by a third one which is my favorite):
1. Outright sale plus annual maintenance: Traditional software selling looks a little like this: You assess the customer’s needs, come up with a configuration that works, then try to sell it. It’s a “widgets” model that has been around since commodity money began to replace the bartering system around 700 BC.
- Money up front: You get paid up front and can pay on commissions with little risk.
- Additional revenue every year: In the form of maintenance fees, anywhere from 15% to 25% of the original selling price.
- Far too easy to lose on price: Software solutions are no longer novel and customers are getting pretty good at line item comparisons. Far too often than not, customers make decisions based on price, especially in a maturing market with lots of proven and effective solutions.
- Lack of stickiness: When you sell something to somebody the transaction leaves you out of their circle of influence. There is no ongoing value or reason to continue their relationship with you as a provider.
2. Recurring Revenue Models: Subscription models for software solutions have become all the rage. Put simply, companies pay a fixed monthly fee for a product or service. You probably have a few subscriptions for things that you used to buy outright. You likely pay a fixed monthly fee for your telephony and internet services. Google Play Music and Apple Music are quickly replacing traditional CD and MP3 sales. In the business world, Microsoft Office 365, an annual subscription offering, is becoming a strong alternative to one-time traditional Microsoft Office sales.
- Recurring Revenue Stream: In my own particular business sphere this is how we make money. That hasn’t always been the case. Once we were a “widget” sales company and every month was do or die. Thank goodness those days are no more.
- Increased Corporate Valuation: If you have any intention of selling your company, be it in the next 5 years or the next 50 years, you will get far more money if you have a strong recurring revenue model vs a widget sales model. Period.
- Rule of 78: Thanks to the “Rule of 78”, every dollar you bring in on any given month will be there as new revenue the following month! It’s why SAAS (Software as a Service) is the model of choice for many providing software solutions.
- Budgetable Costs: Customers who prefer subscription billing often cite the ability to budget as a primary benefit.
- Opex Capability: Many organizations view software as an administrative necessity and not as an asset. You’ll need to understand Opex vs. Capex and don’t be afraid to discuss preferences with your customers. Many items that used to be considered Capex have evolved into Opex.
- Long term costs: Subscription services over a 5 year term usually cost a little more than an outright software purchase. Most times I’ve run into this argument with a customer, they usually weren’t “value buyers” and it saved me a lot of headaches down the road.
- Fairly easy to price compare: A fixed monthly fee for a single software or service is easy to price shop. The market for subscription billing is a young one so at least there isn’t a ton of competition.
3. Bundled Subscription: Under this model, many services and software pieces are bundled together for one monthly fee. I know and love this model. The company I work for charges a flat, low monthly fee our Premier members. We give them access to all of Print Audit’s software tools and expertise, no matter how much is consumed. This can be done for any offering, even if hardware and consumables are involved.
- Difficult to “Price Compare”: By offering a bundled service under monthly subscription it will be very difficult for your competitors to break out individual cost elements. This model doesn’t allow for price undercutting as it is far too risky.
- Reduced Sales Cycle: If you simply include the software in your final solution build you get rid of one more selling cycle.
- Better Margins: Just because you include software in your final solution doesn’t mean you aren’t going to make money, far from it. You aren’t giving it away. You just aren’t offering it as a separate line item or sku. You are bundling. At Print Audit, our most successful Premier members deliver our solutions to their customers as part of their standard MPS (Managed Print Services) offering. Bundling works. A new and exciting subscription model in the office equipment vertical is known as SBB (Seat Based Billing) and requires the bundling of all or most program elements. The same would hold true even if your industry is wildly different from the one I know and love.
- Building a quote is more difficult: The downside to building a bundled subscription offering is that it is harder to get the quote right. For example, offering and charging a flat monthly user fee for office copy and print requires a thorough assessment to understand volumes and user print behaviors. A price book is impossible. That’s also a benefit as your competitors won’t be able to figure out how you got to the quote in the first place. A little pain for a lot of gain.
- Some customers want line items: If you are selling a value-based offering this is a good way to cut out those who are simply price buyers. Do you really want them anyway?
- No initial big revenue hit: A traditional sales model means you get all your money up front. Of course margins are slimmer and you will win fewer deals in a widgets model, and monthly sales will cause your books to sink or swim.
The best time to sell something widget-style is when you command the market. But this traditional model only works well in the early days of a product life cycle. As more competitors enter the market place, and the less unique your offering becomes, the more likely it is that you will suffer slimmer margins and lower win rates. Simple subscription models can be a great next step but in time can become prone to the same market pressures as traditional sku-based selling. Bundled subscription is by far and away the best way to improve margins and increase win rates, especially in a maturing and consolidating industry. Feel free to message me on Linkedin or contact me at Print Audit if you would like to learn more about how you can get bundled subscription working for your company today. Reliable revenue streams, greater margins and higher win rates are waiting.
Oh, one last note: Software and workflow solutions, although powerful, won’t fit every need. Enjoy the following video. 🙂