Idc Saa S Pricing Briefing 061709
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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

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Idc Saa S Pricing Briefing 061709 Presentation Transcript

  • 1. Going Hybrid with SaaS: Managing Perpetual and Subscription Businesses In the Same Chassis an IDC Breakfast Briefing Amy Konary Robert Mahowald Director, Worldwide Software Director, Worldwide Pricing & Licensing Research Software-As-A-Service June 2009 Program (SaaS) Research Program IDC IDC Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved.
  • 2. Agenda Market Landscape What do Customers Want? Why go Hybrid? Best Practices for Hybrids IDC Recommendations © 2008 IDC 6/18/2009
  • 3. IDC IT Spending Expectations WW IT Spending 7.3% 7.1% 5.8% US 5.6% Worldwide 4.2% 4.3% 2.3% 3.2% 2.7% 1.6% 2007 2008 2009 2010 2011 2012 -1.5% Source: IDC Q1 2009 Worldwide Black Book Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved. 3
  • 4. Visceral 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 © 2008 IDC 6/18/2009
  • 5. Most Attractive Features of Software Pricing Model Today 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 Source: IDC Survey of Software Pricing, April 2009, n=185 © 2008 IDC 6/18/2009
  • 6. Customers Seizing the Opportunity Q: Now is a good time to negotiate deep discounts on software - % Strongly Agree 1,000+ employees Company 100 to 999 employees Size <100 employees Manager Title VP or Director C-Level IT Type LOB Total 0 20 40 60 80 100 % Agree Source: IDC Survey of Software Pricing, April 2009, n=185 © 2008 IDC 6/18/2009
  • 7. 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 © 2008 IDC 6/18/2009
  • 8. 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 Why Be Normal? © 2008 IDC 6/18/2009
  • 9. Software Industry Landscape Software as a Service Service DELIVERY APPROACH These approaches can be mutually 88% of WW exclusive! software revenue in Product 2009 LICENSING APPROACH Perpetual Subscription © 2008 IDC 6/18/2009
  • 10. Subscription 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%) © 2008 IDC 6/18/2009
  • 11. Commitment to SaaS, 2008-2010 Level of Commitment to SaaS Applications as a Percent of Overall Applications Use, 2008-2010 88% of US organizations using SaaS will grow or maintain their level of SaaS services 76% of US organizations use at least 1 SaaS service; 80% of US organizations < 500 employees use at least 1 SaaS service 45% identified at least one application or process which would be migrated from an existing on- premise application to a SaaS service 74% will source at least 25% of all applications via SaaS Source: IDC SaaS Adoption Survey, November 2008. n= 200 US-based IT Director and above, and 200 LOB Director and above. 11 © 2008 IDC 6/18/2009
  • 12. What’s Different About SaaS? For providers, this means… Offsite, provided by third-party provider - “In the cloud” execution, which for most SLA rests with ISV or designee practical purposes means offsite, location- agnostic Accessed via the Internet - standards-based, N-scale service universal network access Minimal/no IT skills to “implement” - online, simplified specification of services and no Real-time; run by non-techies lengthy implementation of on-premise systems Automated Provisioning - self-service requesting, near real-time deployment, Highly transactional; Dynamic dynamic & fine-grained scaling scaling and flexing of capacity Fine-grained Pricing - usage-based pricing capability though some providers mask this Priced based on delivering granularity with long-term, fixed price ongoing “shared value” agreements Shared resources/common versions – Configure vs. customize, with integrations and Single code base, multi-tenant client-side optimization architecture © 2008 IDC 6/18/2009 12
  • 13. Why Go Hybrid? • Buyers want choice: 74% of IT Customers respondents (85% of LoB ) said • Addresses needs today: TTV SaaS provided important new • Provides new sourcing options from sourcing and pricing options trusted vendor • Change their IT posture (cost center to service center, situation SaaS to transformational… Vendors • Competitive push • Customer pull • New market opportunity (72% said they would look to an existing vendor first when sourcing a new application) • Buyers want guidance: • Growth within existing customers Alternative sourcing vs. transformational (10% vs. 100%) • GROWING PAINS © 2008 IDC 6/18/2009
  • 14. Small ISVs Have a Fighting Chance with Hybrid 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 1,000+ employees Company 100 to 999 employees Size Under 100 employees Manager Title VP or Director C-Level IT Type LOB Total 0 20 40 60 80 100 • 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… Source: IDC Survey of Software Pricing, April 2009, n=185 © 2008 IDC 6/18/2009
  • 15. What Are Key Vendors Doing? “We care about scale and subscribers” Low cost for entry, but we’d like you to PaaS and Cloud- “We have established stay awhile…” Scale Providers brand, customers, and channels… Are these assets SalesForce or liabilities?” Amazon Google SaaS Providers Workday Taleo Traditional ISVs Concur EMC/Mozy RightNow HP Symantec Adobe “We don’t have legacy Sungard perpetual license issues, and IBM we understand we might hit a ceiling as we scale from SMB Microsoft and mid-market into enterprise SaS – what’s the right model?” © 2008 IDC 6/18/2009 15
  • 16. Hybrid: 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 © 2008 IDC 6/18/2009
  • 17. Building 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 compensation SaaS 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… © 2008 IDC 6/18/2009
  • 18. 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 © 2008 IDC 6/18/2009
  • 19. Building A Hybrid Business: Pricing Do Do Not • Keep it simple & start small • Bracket by customer size •Take a portfolio approach • Create a “lite” product for SaaS/subscription • 3-4 year break-even •Assume your hunters will sell • Combine RTU, maintenance, (and SaaS/subscription hosting) in one price • Over-protect against • Set sales compensation to neutral cannibalization • Offer annual contract, with discounts for longer terms • Consider the channel impact © 2008 IDC 6/18/2009
  • 20. Building A Hybrid Business Other 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? © 2008 IDC 6/18/2009
  • 21. What’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 © 2008 IDC 6/18/2009
  • 22. Robert Mahowald 5 Speen Street Amy Konary 5 Speen Street Director, Worldwide Framingham, MA 01701 Director, Worldwide Software Framingham, MA 01701 Software-As-A-Service Pricing & Licensing Office: 1-508-988-6701 Research Office: 1-508-935-4055 (SaaS) Research Program rmahowald@idc.com IDC akonary@idc.com IDC Twitter: SaaSpro Twitter: Akonary www.idc.com www.idc.com 22 © 2008 IDC 6/18/2009