21 Feb 2013
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All hail the subscription-based business model

By Donovan Jackson

Unless the rock under which you’ve been living lately is particularly comfortable, you’ll have noticed that vendors everywhere are pushing hard towards subscription-based business models.

From Microsoft and it’s new versions of Office, to Google and Amazon and everyone in between, getting paid monthly is now considered a far more attractive proposition than getting more money upfront.

This trend has even led to the establishment of new businesses – like Zuora - which provide billing systems for subscription-based business models.

John Ruthven, SVP Sales at Zuora, says the subscription-instead-of-buy model is increasingly preferred by customers and vendors alike. “You’ll find that these kinds of companies command a premium on Wall Street, too,” he notes – though also opining that this may just be on account of the bean counters there not quite knowing how to value such organisations.

Trouble is, while this business model is in vogue, crusty old accounting systems weren’t built with it in mind.

“The financial systems used by a lot of these businesses aren’t designed to handle the transactions which come with a monthly payment for software or services,” says Ruthven.

Ahah. That’s what Zuora does, see. “Doing subscription-based billing properly is really hard, whether you’re a large enterprise with an established ERP system, or a software startup trying to muddle through with spreadsheets. It’s not practical, and there are unique requirements,” Ruthven notes.

It goes deeper than pricing and billing, though. Ruthven observes that “The move to consumption based pricing is a move from product to relationship”.

Clive Gold, EMC Marketing CTO, picks up on the shift in business model. Writing in his blog he notes, “This trend is not just a different way to pay for something, which is the way that a great deal of IT companies have viewed it, but the beginning of a new business model completely.

"Now, we all understand the change to consumption moves the focus from features to outcome; however, how does this play out in the future?”

The hopeful answer which Gold also phrases as a question, is this. “If I subscribe to a service that meets my needs today, and my needs evolve over time, should I expect my current supplier to evolve their service? I’m guessing that the successful ones will and they will be the winners.”

This differs from traditional, fixed-delivery outsource models (and most definitely from buy-once-and-walk-away software purchases) because, writes Gold, “With traditional outsource arrangements…the requirements and the contract slowly drift apart… leaving both parties unhappy!”

It’s the way of the future, apparently. You saw it here first.

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