Software Subscriptions Maximize Supplier Revenue & Customer Costs

Updated: Aug 23, 2021

The continuing shift to subscription-only software is being fueled by two powerful forces: the customers’ desire to increase speed and agility, and the suppliers’ desire to increase profits. As we stated one year ago, subscriptions address both appetites, although the suppliers are definitely coming out on top.

In the past 12 months, we’ve seen explosive year-over-year growth in cloud-based/subscription revenues, and it looks like this:

Recent Quarterly Earnings from Subscription and SaaS Revenue*

Top IT suppliers revenue growth with adopting subscription only pricing models

*Many suppliers combine these categories in their earnings reports. All suppliers report subscription deals are comprising a growing majority of their bookings, and at Adobe and Citrix, more than 85% of the revenue comes from subscriptions.

What This Means for Customers

Customers are feeling the pain from the move to subscription-based SaaS solutions. Yes, the “solution” may be “ready-to-go”, but they are still dealing with highly complex legacy technology, which requires enormous switching costs to leave behind. The combination of switching costs and subscription licenses means enormous pricing power for suppliers and built-in risk for buyers.

But customers cannot resist the speed, flexibility and lower start-up costs promised by the cloud offerings, and are weary of managing an antiquated, expensive IT infrastructure. Subsequently, many downplay the fact that these solutions lock them into strict license commitments with no ability to downturn and come with everlasting price increases. They want “agility” and, ironically, wind up wed to inflexible contracts they can’t get out of, which force them to buy constant upgrades they neither need nor want.

What Customers Can Do

We know that the major players in the subscription world compensate their reps on cloud utilization, force upgrades, limit price protection, change packages and SKUs frequently, and make throttling down a customer’s spend intentionally difficult. To combat these finely-tuned sales practices, customers must stop focusing on price in their dealings, and instead, concentrate on a singular objective: maximizing their competitive leverage.

Only leverage delivers the value and optimization needed in these deals. Without leverage, you will not get the renewal rights, price holds, and contractual protections that you are due. And we know that leverage comes from having three things: enough time to set up the deal, alternative options to the deal to provide competition, and a sense of uncertainty surrounding the deal.

At ClearEdge, we inspect hundreds of IT deals each year, and consistently see suppliers successfully exert their will to set the agenda for customers. To neutralize these supplier sales strategies, we help clients improve their ability to build and maintain leverage with a series of proven best practices that span nine areas:

A chart showing nine steps to leverage management in strategizing it deals

In short, this chart provides a repeatable process to help manage leverage. When clients do these things well, their odds of getting a best-in-class deal are consistently high.

For more on the subject of building leverage, read our blog titled Leverage: The Key to Every Deal, and for more detail on subscription-based risk, read our blog titled SaaS Buying Traps and Trends. Additionally, contact your ClearEdge representative for personalized help.

- This article was developed by the ClearEdge Analytics Team.