A computer user about to subscribe to a web-based service.
When is time to to move to a subscription based model? PHOTO: Shutterstock

“The Subscription Economy,” is a term coined by Tien Tzuo, the founder of subscription management software vendor Zuora, as a way to describe an emerging economic model in which people lease, rent or otherwise consume products as a service, rather than buying things in a one-off manner and using them until they break, go out of style or become irrelevant.

There are a swarm of buzzwords that surround that phenomenon, but the one that is top of mind for C-level executives these days is “digital transformation.” In essence, it’s a way to describe the digitization of traditional business models — a process that involves using technology to maximize the service-based revenue options associated with products.

ISVs Must Evolve

As independent software vendors (ISV), we are enablers of this new paradigm — but we also can be swept into dinosaur status if we do not adopt its tenets ourselves. But embracing the subscription economy is, well, hard. It involves undergoing that very same digital transformation ourselves, and moving away from a business model based on selling a product once and then collecting ongoing maintenance and support revenue. It affects compensation models and marketing programs, and it touches the entire infrastructure around the way the product is sold and delivered.

As we decide how to evolve and adapt, we will need deep insight into how our software is being used. For example, one choice may be to grandfather in users who purchased perpetual licenses but only license new users on a subscription basis. However, the decision to go that route needs to be backed by data on how many customers will be impacted and how they’re using the product.

Looking at product usage by runtime, geography and system attributes can help in prioritizing what products (or customer segments) to move first. For example, features that are used most often on a monthly basis could be packaged and priced in a way that is optimized for infrequent but consistent users.

Data Reveals Packaging and Pricing Options

When customers bought your product for on-premises use however many years ago, chances are the functionality they wanted was bundled in with things they didn’t entirely want (or maybe didn’t even need). The secondary tools may have been used now and then, but it’s just as likely that they ended up as shelfware. With usage data, you can identify which functionality is more valuable (and can therefore command higher prices), what tools should be bundled together and more. In such a manner, you can build packages and a la carte offerings that are attractive to your customers — and more profitable for your company.

For instance, say there are two complementary features in an application, but one is much more popular. Six months after the software is deployed, usage data shows that only certain customers use the less popular feature. With more detailed usage analytics, you can create a profile of that feature’s users and learn how, when and why they use it. You can then use that data to develop role- and usage-based licensing options in which pricing is based on real-life scenarios. Over time, that data can be correlated with renewal and retention rates, lending insight on where price increases would be most palatable and how to modify licensing options to boost customer engagement.

Help for Sales and Marketing

Finally, in shifting to a subscription-based licensing model, you will be changing the way your product is marketed and sold. Providing insight into product usage to the people who are responsible for ensuring product adoption empowers marketing and sales to meet the actual (and changing) needs of prospects and customers.

Ensuring user engagement becomes even more crucial as sales reps pursue subscription renewal and expansion opportunities. With rich information on actual use, companies can educate key customers about features and functionality they’re not yet leveraging, thus deepening customer engagement and “stickiness” and boosting ROI. This improves the odds of renewal and increases the likelihood that current customers will be willing to act as references when you pursue new accounts.

Moreover, giving marketers the ability to segment the data by geography, system attributes and feature usage allows them to develop messaging that targets specific pain points or opportunities, and thus increases the likelihood that prospective users will read and respond to email offers.

The move to subscription-based pricing must be carefully planned and choreographed. By leveraging software usage data, you can align your product offerings and pricing to customer needs and maximize the opportunity to be both an enabler and a beneficiary of the customer-centric economy.