Why Subscription Models are the Latest Trend in Enterprise Software
Buying Content Management and Customer Experience Management software is not simple.
Not only are there many solutions out there, but there are different payment models. For example: purely community-based open source, cloud services, commercial open source like eZ, and traditional proprietary vendors. I will focus in this blog post on the last two (i.e. Enterprise-grade software that's quality assured with vendor support and maintenance).
I wanted to share some feedback after 11 years in the field working with partners and customers.
Some Facts on Subscription and Licensing Models
The traditional model is fairly simple. Clients buy a license to use the software, and they do so by paying a high upfront fee to get the software, which results in heavy costs in year one. This is followed by 20-25% maintenance fees for further years. It is also important to know that some vendors also charge for new licenses if the client wants to upgrade.
In the Commercial Open Source world that eZ operates in (it is the same observation in SaaS models), clients subscribe to a service that includes access to software, support and maintenance as well as some other services like audits for instance. The fee is lower during the first year and remains at the same level during the whole contract period. The client also gets access to new versions of the software.
Subscription Models Benefits for the End User
Better price and faster ROI: When looking at the total investment over a three to five years period a subscription model is usually less costly than a license model (but not necessarily much less). However there is a big difference for the customer: the investment during year one. With a proprietary license model the CAPEX, or capital expenditure, is very high, while the OPEX, or operating expenditure, is lower. But with a subscription model the CAPEX is lower and the operating expenditure is higher. This enables customers to receive a quicker return on investment. Indeed since the subscription price is lower, it allows clients to spend more the first year on the customization and optimization services or other aspects, such as advertising, without compromising the support needed during the project development. This enables customers to quickly achieve the goals they have set during such a project. There is real value when trying to continuously measure and optimize. Every client has to find their own way to operate digitally, and by getting more resources to test and optimize they will be faster to succeed.
No Upfront Commitment: Your subscription grows as you do. There is no need to buy extra licenses that you may or may not need down the road. With commercial open source, all the upfront research: evaluating the technology, having your team looking into how it works, doing an "informed acquisition" is absolutely transparent. If the client wants to unsubscribe at the end of the period, he still has the possibility to use the open source version of the software. This is healthy because it forces the vendor to always deliver value in the subscription. It also forces the vendor to keep innovating on the product side to make sure the commercial products add benefits to the open source platform. This means that he doesn't lose all the investments he has made on such a strategic software platform, and can continue working with the core components of the platform. If you compare this with traditional commercial software, you'll find that it is a much more "show me the money" type approach. A client loses everything when they stop paying a traditional software vendor.
Benefits for Implementation Partners
As already mentioned earlier, customers tend to spend more on their agencies during the first project when a subscription-based software is used. This is a direct benefit for partners who now have a better chance to build a long-term relationship and show quicker results. In addition, partnering with a software vendor like eZ helps to build an interesting recurring revenue model by getting commissions every year. Due to the cost efficient aspect of the model and the fact that a subscription includes more services, the commission rates may not be the highest in the industry. But the recurring aspect makes it very interesting, especially when customers have an average lifetime of more than six years.
eZ has been one of the first Commercial Open Source vendor in the CMS market and getting both the benefits of the Open Source community (innovation, no lock in) and the commercial benefits of a vendor is the very core of our business model. It's good to see that both customers and partners, selecting a subscription-based software vendor, see real benefits. This is a trend that we see also in other industries where pay as you go subscription models are becoming more and more present. This is also true when looking at the younger generation. They are 100 digital natives and prefer paying as they go, or renting a service, instead of owning things.
Hopefully, they will be buying more software soon.
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