Subscription Pricing: New Ground for Enterprise Software Vendors

Adobe’s recently announced that their flagship product, Creative Suite, will now only sold as a subscription service.  This is further evidence that the days of selling traditional, out of the box software, in a buy-to-own model is slowing down.  The emergence of cloud computing is not only changing the way consumers access and use software, but also the pricing model for software.  Every major software vendor is now offering SaaS alternatives to hedge against their traditional business models, and not be left behind.

While making the transition, a common mistake companies often make is using the price of the existing on-premise licenses to set prices for their SaaS alternative.  By using the on-prem prices to set SaaS prices, companies miss a great opportunity to re-define a true value-based offering structure and pricing model that could generate higher profits and drive adoption. Companies need to spend time with their customers and understand the value drivers for adopting subscription offerings. Customer value research is a powerful tool that provides critical insights into how customers plan to adopt SaaS offerings and should help companies understand how their service can provide value.  By using this research approach, companies can identify early and late adopters, get inside of the reasons for poor adoption and become a partner as their customers make the sometimes slow and painful transition off-premise.

Today, companies that grew-up with an on-premise solution are hesitant to offer SaaS alternatives. Their fear is that subscription offers will cannibalize the revenue coming in from legacy on-prem solutions.  There is a lot of revenue to protect. The old way of selling and distributing software was extremely lucrative.  When the market was growing, vendors chose to bundle the products into suites and offer perpetual pricing. These software companies recognized more revenue up front. But as market segments mature, demand tapers off and revenue growth slows. Users become content using older generation releases and don’t find the need to upgrade ever year.  Perpetual pricing begins to make less sense for customers. There are fewer big deals to win in the market.  Moving to a subscription model will change the spikes in revenue from these big deals and upgrades, into smooth annuity streams – which Wall Street highly desires.

Adobe was the first major enterprise software vendor to successfully make a complete shift to a subscription model. This transition is never easy, but Adobe’s made it work by sticking to a well-crafted plan:

  • Developed a product road map that was not very disruptive. They started this transition with the introduction of Creative Cloud for individuals in mid-2012 as an alternative to Creative Suite. They communicated the benefits of the cloud alternative, offered a free version to user to give it a try and tested the market for adoption, while still continuing to develop and offer Creative Suite op-premise version. In December ’12, with the subscription service gaining traction, Adobe rolled out an enterprise version of Creative Cloud. After a couple of quarters to evaluate adoption and customer reaction, Adobe went all-in with its latest version of Creative Cloud. That meant as of June ’13, there will be no future versions available through a perpetual license.
  • Develop transition pricing for current customers. With the subscription option Adobe was able to attract users those who had found the Creative Suite’s price too high. Adobe gave new users a free trial version, as well as options to subscribe to a single app or the complete suite. For existing customers who had already made the investment to buy Creative Suite on-premise offered two options – either continues to use current versions, but those products will not get any future feature updates. Or transition to the Creative Cloud at an introductory discounted rate.
  • Communicate the transition and set expectations with Wall Street. As customers migrate to new Creative Cloud subscriptions, revenue recognition happens over time, as opposed to once at the time of purchase. Adobe acknowledged that the transition will hurt at first. Switching to a subscription model did weigh on Adobe’s reported profits and revenue in 2012, they adjusted growth rates for 2012 from the expected 10% to 6%. Because Adobe wasn’t under pressure to generate short term cash, they were able to sustain a period of low revenue growth in exchange for lucrative revenue streams going forward.

Adobe has set a great example of how to successfully manage this transition. Microsoft, SAP, Oracle, Autodesk, etc… have all started on this journey, with varying levels of success. It will soon become imperative for all enterprise software vendors to do so. For some companies, it will be a major change in the way they think about their pricing strategy and sales execution and how revenue is recognized.  A tricky change without disturbing the foundation of the company. But one they will have to make if they want to survive in this new age for software distribution.

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