What to know when adopting subscription or consumption business models

At its core, the change to a subscription model fundamentally transforms the way products are developed and delivered. As a result, enterprise technology companies must create highly customized offerings and price them to be attractive to customers but not “leave money on the table.” Yet our discussions revealed that many enterprise technology companies still don’t have formal programs, strategies or methods in place to profitably price and measure their offerings.

Many of these companies have customers that are happy with the way they buy IT products and services. Enterprise technology companies must offer a compelling value proposition to persuade their customers to switch as well as provide a simple and straightforward path to do so. Certainly, the key to success is the ability to effectively move away from product-based pricing toward new value-based pricing schemes.

As products and delivery methods evolve, enterprise technology companies must also choose what markets to serve. Our research shows that many enterprise technology companies have not done a proper customer segmentation analysis to determine which markets they can operate profitably in or what capabilities they need to serve them. We found that successful enterprise technology companies incorporate data-driven customer segmentation early on as they develop their strategic road maps.

Sales incentives can be a particularly challenging area. The move toward subscription requires enterprise technology companies to completely rethink how they incentivize, measure and equip their salesforce and third-party sellers. This is particularly difficult if they offer a mix of both traditional and subscription options.

Wrestling with how to calculate compensation, including commissions and bonuses, in a way that appropriately balances the needs of the salesforce, customers and the larger enterprise goals is key. Sales training is equally important, since most salespeople are still accustomed to selling licenses. Training must be accompanied by an effective set of quoting and pricing tools, updated competitive benchmarking and new total cost of ownership (TCO) calculators to explain TCO across different consumption models, and new solution-based value propositions.

While specific leading practices are still emerging around sales compensation, most enterprise technology companies recognize the need to move away from a “sell things” mindset to one that’s more focused on nurturing long-term relationships. This is critical, because it can take up to two years to cover the cost of sales and begin to turn a profit.

Companies are also finding that establishing a customer success organization — one that monitors and reacts to the needs of customers along their journey — is a powerful tool to help enhance and maintain that critical relationship. Companies with well-developed customer success organizations use sophisticated data tools to understand customer behaviors. These behavior trends can be shared with clients to help them maximize the services they buy, creating a powerful upsell tool. These tools can also be used to proactively identify and address potential issues.

Companies also are grappling with how and when to use customer incentives. Many of our clients’ customers don’t understand how new models will benefit them. This requires being prepared to demonstrate the costs and delivery benefits of subscription models. Some enterprise technology companies are creating value metrics that their salespeople take to market. Others phase discounts out over time or sunset their legacy products, in effect forcing customers to move away from licenses to subscriptions.

Many enterprise technology companies are unprepared for the move or are unsure about their organizational readiness. They do not have an integrated operating model capable of supporting a combination of new and existing offerings across the enterprise. Areas that are often overlooked are back-end supporting processes, such as product entitlements and provisioning, customer support, and billing and invoicing.

The lack of well-developed product usage and adoption metrics also surfaced as a challenge for many enterprise technology companies. A lack of these metrics creates a significant blind spot for gauging the success of current products and limits visibility into upsell opportunities. It also leaves enterprise technology companies unable to adjust quickly to market shifts and hampers their decision-making around long-term investment priorities.