Sep 27, 2011

Cloud-based delivery model

My company is considering changing our business model to become a SaaS-driven organization, so rather than selling licenses for software outright which customers would host on their own servers, they would subscribe to our products and connect via the cloud. One of our concerns is the impact this shift will have to our economic model--lower upfront revenue of subscription vs. traditional license. Are there any recommendations on how to minimize the risk associated with this shift? We're still expecting to maintain our consulting/implementation revenue somewhat, since our products are complex and our customers seem to enjoy a little hand-holding at least initially.


While short-term revenue shift is a concern that all traditional on-premise technology companies face as they make a transition towards delivering cloud based subscription services, cannibalization of existing revenue streams is a bigger threat and addressing it requires a clearly thought through offering strategy, i.e. which customer segments are to be targeted with a cloud offer? Is there a differentiated value proposition of the cloud vs. traditional offers? How can my cloud offer drive incremental net new revenue? Companies that have been most successful with launching cloud offers have been thoughtful about creating distinct & incremental value prop with these offers – three strategies could work:


1. Positioning all the value added “benefits” that your cloud based offering brings to the table, and pricing appropriately for it; e.g. hosting services, managed environment  - quicker updates, no client installs, uptime SLAs, etc. Using this approach could surface opportunities to revisit the existing base to up-sell these additional features


2. Creating cloud base “add-on” services in adjacent areas; e.g. data and analytics, Optimization services, etc.


3. Create offers to target a distinct customer or market segment, e.g. SMBs, emerging countries, or new industry sub-segments


Strategy #1 and #2 above leverages the cloud model to inherently increase the value proposition of the core product and can be leveraged to drive incremental net new revenue even within the existing base. #3 has the potential to cannibalize existing product sales if the positioning is not appropriately targeted.


-- Dhaval Moogimane, Partner, Waterstone Management Group 



Well, there are two common approaches to increasing revenue. The first is to attract new customers. The second is to increase sales from your existing customer base. Is your cloud-based delivery mechanism capable of doing everything that the boxed software could do? If so, then you don't want to set your prices for the cloud-based services to a great deal less than the existing product because of how it cannibalizes your existing sales. And if the cloud-based method offers more features or different features, then you should market it in such a way to highlight those differences as improvements.


As for the customer hand-holding, consulting services are a great way to increase revenue because you're not just getting paid to have customers become more familiar with their product; it also gives you insight into how your customers use your product, how their business process flows, and perhaps even tells you about their concerns or informs you about the kinds of things they would like to see in the future. Building a better relationship with existing customers is a critical skill, especially as we move to hosted software systems.

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