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Subscription models are upending business as usual

Many companies are moving to subscription-based models to deepen customer relationships.

Two years ago, Adobe took a leap of faith. It transformed the way it sold software products by moving from packaged...

CDs to a cloud-based subscription model.

"When we launched [Adobe Creative Cloud], we were at the edge of the precipice about to jump off," said Maria Poveromo, senior director of public relations and social media at Adobe Systems Inc. "Executives were very concerned."

But while management worried about how customers would perceive the shift, it also saw the writing on the wall. The traditional way of selling software had become outmoded, and the company risked getting left behind by consumers who wanted a different kind of service.

It was either transform or die -- and it was terrifying.
Maria Poveromosenior director of public relations and social media, Adobe Systems Inc.

"Our creative customer base wanted less friction and more value on an ongoing basis," Poveromo said. "They didn't want to wait two years for a bug fix. I don't think it's hyperbole to say that it was either transform or die -- and it was terrifying."

A year ago, Adobe Creative Cloud stepped further into the breach and ceased development of physical packaged software, moving to subscription-only services.

Adobe's shift in delivery model from physical packaged software to subscriptions signals a larger business trend. In today's "age of the customer," as Forrester Research has dubbed it, companies need to make customer service more agile, real-time and consumer-focused, an issue that emerged in high relief at the Social Shakeup conference, Sept. 16-17 in Atlanta. Among other themes, the conference explored ways in which companies are transforming business models to become more collaborative and agile and to place customers at the center.

Kelly Blackman, an account executive at Zuora Inc., a company that offers cloud-based billing and subscription technologies, said that companies used to engage with customers in a one-off way that often killed relationships before they really began.

"The traditional way of thinking about the company relationship with customers was a one-night stand," Blackman said. "Now it's about relationships over the long term," which allows companies to know customers over time, upsell through additional products and services, and provide better customer experience.

New business strategy needs a new culture

While Adobe" ripped off the Band-Aid," according to Poveromo, and forced its customers to accept dramatic changes to its software model, Sage Software Inc. treaded more slowly. The company supplies software to accountants, who "don't like change -- and that's an understatement," said Greg Tirico, director of digital media and content at Sage.

The traditional way of thinking about the company relationship with customers was a one-night stand.
Kelly Blackmanaccount executive, Zuora Inc.

"We couldn't just rip the Band-Aid off," Tirico said. "We would have alienated our existing customer base." So Sage began with an entry-level offering for small and medium-sized businesses, SageOne, and packaged together subscription and support at $9.99 a month.

But Sage learned the hard way that the mere act of launching a subscription-based product wasn't going to transform sales -- or the business model. The company initially wanted to get the word out about its new low-cost subscription service by hiring people to make cold calls about the new offering.

"We couldn't wrap our heads around the fact that you don't hire people to sit on the phone for a $9.99-a-month product," Tirico said. "That's ridiculous." Instead the company needed to focus on marketing efforts, he said, to evangelize rather than use ground-war tactics for such a low price point.

Adobe's Poveromo noted that companies need to rethink virtually every aspect of the business to get the subscription model right.

"How do you become Amazon overnight if you weren't that [previously]?" she said. "So you need to retool and reskill your staff. It means waking up every day and getting customer feedback immediately … to be more attentive and in tune with what customers want."

Zuora's Blackman echoed that notion, saying that subscription-based business models require nothing less than an overhaul of company culture and operations, from packaging to sales to pricing and metrics -- and, of course, company valuation.

"The balance sheet is missing recurring-revenue metrics. Traditional ERP and financial packages can't handle these new metrics," she said.

But Adobe's Poveromo noted that the new subscription economy places greater onus on companies to be responsible with the information they gather from customers. In exchange for insight, companies should recognize their roles as information stewards who can honor -- or abuse -- customer data.

"With great data comes great responsibility," Poveromo said. Companies need to be "honest, open and transparent about the customer data they track. They need to say to customers, 'This is the kind of data we track to improve customer experience. You can opt out at any time.' Because otherwise, you can get a serious backlash."

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Great examples of how companies are adjusting strategy in this article. The subscription model transition can be a real sink or swim moment.
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