idc saa s pricing briefing 061709
DESCRIPTION
Going Hybrid with SaaS, Managing Perpetual and Subscription Businesses in the same ChassisTRANSCRIPT
Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved.
Going Hybrid with SaaS:Managing Perpetual and Subscription Businesses In the Same Chassis
Going Hybrid with SaaS:Managing Perpetual and Subscription Businesses In the Same Chassis
Robert Mahowald
Director, Worldwide Software-As-A-Service (SaaS) Research Program
IDC
Amy Konary
Director, Worldwide Software Pricing & Licensing Research Program
IDC
an IDC Breakfast Briefing
June 2009
6/18/2009© 2008 IDC
Agenda
Market Landscape
What do Customers Want?
Why go Hybrid?
Best Practices for Hybrids
IDC Recommendations
Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved.
7.3%
4.3%
2.7%
1.6%
3.2%
7.1%5.8%
-1.5%
5.6%
2.3%
4.2%
2007 2008 2009 2010 2011 2012
US
Worldwide
Source: IDC Q1 2009 Worldwide Black Book
IDC IT Spending ExpectationsIDC IT Spending Expectations
3
WW IT Spending
6/18/2009© 2008 IDC
Visceral Reactions- VendorsVisceral Reactions- Vendors
Renegotiating existing contracts with partners• OEM, ISV Royalty• Where are the negotiation points?
Looking for ways to gain competitive advantage• Project Liberate• 3rd-Party Maintenance Firms
Reducing prices• Big discounts on license• Concessions on maintenance• Canceling or delaying scheduled price increases
Looking to improve licensing operations
• Technology
Launching or refining new business strategies• Subscription/term licensing• Software as a Service (SaaS)• Open Source
6/18/2009© 2008 IDC
Most Attractive Features of Software Pricing Model TodayMost Attractive Features of Software Pricing Model Today
Source: IDC Survey of Software Pricing, April 2009, n=185
1. Models that help reduce the burden on capital
budgets by shifting software spend to OPEX
2. Models that distribute costs evenly over time
3. Models that tie pricing to usage, like a utility
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Customers Seizing the OpportunityCustomers Seizing the Opportunity
0 20 40 60 80 100
Total
LOB
IT
C-Level
VP or Director
Manager
<100 employees
100 to 999 employees
1,000+ employees
% Agree
Q: Now is a good time to negotiate deep discounts on software - % Strongly Agree
Source: IDC Survey of Software Pricing, April 2009, n=185
CompanySize
Title
Type
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Will All of This Normalize Pricing?Will All of This Normalize Pricing?
What is Normal?
• High, up-front license costs followed by a large, ongoing maintenance fee• Customers that feel bullied into buying via aggressive sales techniques• A software value disconnect
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Will All of This Normalize Pricing?Will All of This Normalize Pricing?
What is Normal?
• High, up-front license costs followed by a large, ongoing maintenance fee• Customers that feel bullied into buying via aggressive sales techniques• A software value disconnectWhy Be
Normal?
6/18/2009© 2008 IDC
Software Industry LandscapeSoftware Industry Landscape
Perpetual SubscriptionLICENSING APPROACH
Service
Product
DEL
IVER
Y A
PPRO
ACH
These approaches can be mutually exclusive!
Software as a Service
88% of WW software
revenue in 2009
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Subscription is HereSubscription is Here
Of the top 100 software vendors worldwide by revenue, 40% report subscription revenues
For 13% of the top 100, subscription represents greater than 50% of total software revenues
Salesforce.com is the only pure-play SaaS provider to make it into the top 10 vendors according to software subscription revenue
Projected growth in SaaS impacts the subscription forecast, with SaaS-revenues making up 32% of the overall subscription forecast in 2008 and 33% in 2009.
2009 Spending on SaaS (est $9.5B WW) is YoY growth of 42% vs. All software: (3.4%) vs. All Applications (5.6%)
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11
Level of Commitment to SaaS Applications as a Percent of Overall Applications Use, 2008-2010
Source: IDC SaaS Adoption Survey, November 2008. n= 200 US-based IT Director and above, and 200 LOB Director and above.
Commitment to SaaS, 2008-2010
74% will source at least 25% of all applications via SaaS
88% of US organizations using SaaS will grow or maintain their level of SaaS services
45% identified at least one application or process which would be migrated from an existing on-premise application to a SaaSservice
76% of US organizations use at least 1 SaaS service; 80% of US organizations < 500 employees use at least 1 SaaS service
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What’s Different About SaaS?What’s Different About SaaS?
Offsite, provided by third-party provider -“In the cloud” execution, which for most practical purposes means offsite, location-agnostic
Accessed via the Internet - standards-based, universal network access
Minimal/no IT skills to “implement” - online, simplified specification of services and no lengthy implementation of on-premise systems
Automated Provisioning - self-service requesting, near real-time deployment, dynamic & fine-grained scaling
Fine-grained Pricing - usage-based pricing capability though some providers mask this granularity with long-term, fixed price agreements
Shared resources/common versions –Configure vs. customize, with integrations and client-side optimization
N-scale service
Highly transactional; Dynamic scaling and flexing of capacity
Real-time; run by non-techies
Priced based on delivering ongoing “shared value”
SLA rests with ISV or designee
Single code base, multi-tenant architecture
For providers, this means…
6/18/2009© 2008 IDC
Vendors• Competitive push• Customer pull• New market opportunity (72% said
they would look to an existing vendor first when sourcing a new application)
• Growth within existing customers• GROWING PAINS
Why Go Hybrid?Why Go Hybrid?
Customers• Addresses needs today: TTV• Provides new sourcing options from trusted vendor• Change their IT posture (cost center to service center, situationSaaS to transformational…
• Buyers want choice: 74% of IT respondents (85% of LoB ) saidSaaS provided important new sourcing and pricing options
• Buyers want guidance: Alternative sourcing vs. transformational (10% vs. 100%)
6/18/2009© 2008 IDC
0 20 40 60 80 100
Total
LOB
IT
C-Level
VP or Director
Manager
Under 100 employees
100 to 999 employees
1,000+ employees
Q: My organization is open to buying from a small firm with a very short track record, if the price is good and functionality seems at least comparable- %Agree
Source: IDC Survey of Software Pricing, April 2009, n=185
CompanySize
Title
Type
• Customers willing to take a risk provided there are savings built-in…• Approximately 65% of net new applications offerings WW in 2008 were subscription-based SaaS offerings (whether hybrid or pure SaaS)• If priced and marketed correctly, very small ISVs can look larger than they are…
Small ISVs Have a Fighting Chance with HybridSmall ISVs Have a Fighting Chance with Hybrid
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What Are Key Vendors Doing?What Are Key Vendors Doing?
PaaS and Cloud-Scale Providers
Traditional ISVs
SaaS Providers
EMC/MozyHPSymantecAdobeSungardIBMMicrosoftSaS
WorkdayTaleoConcurRightNow
SalesForceAmazonGoogle
“We care about scale and subscribers” Low cost for entry, but we’d like you to stay awhile…”
“We don’t have legacy perpetual license issues, and we understand we might hit a ceiling as we scale from SMB and mid-market into enterprise – what’s the right model?”
“We have established brand, customers, and channels… Are these assets or liabilities?”
6/18/2009© 2008 IDC
Hybrid: A Bipolar Business CultureHybrid: A Bipolar Business Culture
“Our perpetual business is driven by elephant hunter DNA: hunt the biggest animals, figure out what to do later.”
“In our subscription business, we start small and expand over time. We are focused on making sure we live up to our commitments because if we don’t, we’ll never get the renewal business.”
Source: Interview of software publisher on managing hybrid perpetual, subscription businesses, 2009
6/18/2009© 2008 IDC
Building A Hybrid Business: SellingBuilding A Hybrid Business: Selling
Sales Approach is “Always Be Selling”“Software” means large up front investment in both license and hardware
Requires consultative and solution-selling approach, not IT-centric
SaaS is fee/consumption-based, no hardware, and requires accelerated sales techniques
– Lower hurdle to acquire customers, greater emphasis on customer retention,upsell, cross-sell
Ordering and billing infrastructure “Software” ordering, provisioning and billing process is not automated
– Means long sales cycle; one-time, up-front billing
SaaS ordering, provisioning and billing process done in real-time– Customers want to evaluate, purchase & provision online or telephone sale
Sales compensationSaaS is low price-point, high volume. Typically sales execs paid for up-front license revenue, not recurring annuity stream: the SaaS job is not over when the contract is signed…
6/18/2009© 2008 IDC
Building A Hybrid Business: Merchandizing
• Predictability – yours and theirs. You want a consistent COGS and recurring revenue, and they want cost smoothing over time.
• Set-up Fees - How much will implementation slow down the sales process? What is reasonable and how does this influence the monthly recurring prices? Goal: remove barriers to quickly get customer to VALUE
• Minimums – Several SaaS vendors employ a usage-based pricing similar to usage tiers on cell phone plans -- in these cases the vendors choose to decrease implementation fees in order to get higher minimums
• Contract Length – Our survey data point to an expectation that price/user or cost for add-ons will be lowered or at least more negotiable with a longer-term commitment: 3 years is the norm to secure that break
• Differential price – An advantage of established vendors with mature brands, not value-based or cost-plus: eg. Microsoft Exchange vs. BPOS
6/18/2009© 2008 IDC
Building A Hybrid Business: PricingBuilding A Hybrid Business: Pricing
• Keep it simple & start small
•Take a portfolio approach
• 3-4 year break-even• Combine RTU, maintenance, (and hosting) in one price• Set sales compensation to neutral • Offer annual contract, with discounts for longer terms
• Consider the channel impact
• Bracket by customer size• Create a “lite” product forSaaS/subscription•Assume your hunters will sellSaaS/subscription• Over-protect against cannibalization
Do Do Not
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Building A Hybrid BusinessOther Considerations
• Separate business or not? How important is brand?
• Channels: Traditional reseller can get a 30% cut, but you might only need 10-25. Online affiliates get 10-30%, but you may need 1,000+…
• New marketing organization? Marketing for new SaaS initiative is typically highest cost – 50-65% of COGS
• Separate sales? Revenue recognition? Can software sales reps learn to “always be selling”?
• Common engineering core? Share this with traditional R&D?
• Support: who will fulfill the SLA in a real-time business?
6/18/2009© 2008 IDC
What’s Next and Essential GuidanceWhat’s Next and Essential Guidance
• SaaS is not a fleeting trend, and it’s important to build a hybrid company: Vendors cannot safely orient themselves around a perpetual model any longer, and expect to gain share (no matter what the economic climate)
• Reorganize your company’s culture into a hunter/gatherer approach or a dual/hybrid distribution and selling model
• Engage with customers and be open to change
6/18/2009© 2008 IDC
22
5 Speen Street
Framingham, MA 01701
Office: 1-508-988-6701
Twitter: SaaSpro
Robert Mahowald
Director, Worldwide Software-As-A-Service (SaaS) Research Program
IDC
www.idc.com
5 Speen Street
Framingham, MA 01701
Office: 1-508-935-4055
Twitter: Akonary
Amy Konary
Director, Worldwide Software Pricing & Licensing Research
IDC
www.idc.com