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How Licensing is Transforming Software Packaging into a Win-Win for ISVS and Customers

July 01, 2014

The world of independent software vendors (ISVs) continues to adopt/be transformed by the increased software-centricity of “E”verything and the use of the cloud for all aspects of software delivery, security, monetization and license entitlement management, including the critical area of compliance.  While much of the focus has been on how ISV intellectual property is now delivered, tracked and consumed by end customers, a little appreciated part of the transformation it is creating, is in the key area of software packaging. What is happening is not just disruptive, but could be characterized as a virtual revolution.

 I recently had an opportunity to discuss with Joshua Bloom of Simon-Kucher & Partners, how  implementing best practice software packaging is reshaping the relationships of ISVs with their customers, and how the adoption of these practices is a win/win for customers and a company’s sales team – leveraging the ability to expand pricing models to land and expand their businesses.

TMCnet: You describe packaging based on taking advantage of next generation licensing solutions as “an evergreen challenge” for ISVs. Can you elaborate?

Bloom:  At a high level, based on our engagements with over 50 software companies, it is clear that flexible and adaptable licensing leads to increased ability to package. It is also fair to say there are benefits from both seller and customer perspectives.

There are a number of factors that drive how to package from a seller’s perspective. These include such things as customer willingness to pay, transfer from high value leader to lesser ones, billing, etc. However, the big benefit is it creates a situation where you are competing on full solution instead of point solution basis.  It enables the positioning of an ISV’s full portfolio. This is crucial in the software industry in general where barriers to entry have lowered in the last few years.  The objective is to ward off those with a narrow focus, and establish a one-stop shop in an environment where enterprises of all sizes are culling their trusted vendor lists to simplify how they run their businesses. It is an extremely compelling viewpoint.

Indeed, this idea of having one responsible party, where you can take advantage of value packaging and pricing is extremely attractive to customers.  

TMCnet:  Just to provide a level set. What you are pointing out is that when ISVs and customers agree to using the Software as a Service (SaaS (News - Alert)) model, the ISV is producing one complete version of their software where customers decide which features and functionality they wish to use, and where the business model is pay-as-you-go and pay-as-you-grow?  And, that SaaS gives ISVs greater visibility into what is being used, when, how and by whom and whether licensees are in compliance with license terms and conditions, and customers absurdity that they have the latest and greatest and are only using and paying for what they need?

Bloom:  That is absolutely correct.  In fact, one compelling argument for SaaS, from a purely business perspective, is that the multiples for SaaS solutions providers are higher than their on-premises competitors. We have seen, for example, valuations of more than 30 times earnings v. 7-9 ratio for those with predominantly premise-based solutions. It is why you see so many legacy software providers rushing to embrace the cloud for financial as well as competitive reasons.

SaaS just makes so much sense because it gives end user organizations significant cost-savings and peace of mind about being current. For the ISVs, the flexibility you described means a reduction in development time and cost, and a tool for better, more accurate and timely monetization of their applications. It also translates into being able to provide better customer care, a simplification of the billing (renewals and upgrades) environment, as well as business intelligence on what to offer next and what not to spend time on. As I noted, this really is a win, win that is both more vendor and user friendly, and in many ways more trustworthy as well.

TMCnet: Renewals is a big and important area. Why is using this licensing instance so important when it comes to packaging?

Bloom:  We hear so much today about improving the customer experience. Putting aside prospecting for new customers, renewals is where vendors get an opportunity to generate new revenues and create and sustain brand loyalty.  As part of best practices we work with our clients on what is called a “customer risk score.” It is what the name implies, i.e., how likely is a customer going to churn when it is renewal time?  It is what software monetization monitoring tools such as those offered by SafeNet that give ISVs deep visibility into not only cloud-based licenses but on premise ones as well, have become so critical. The knowledge of how software is being used and by whom allows ISVs to tailor bundles and pricing options that can reduce the risk of churn and engage in conversations about up-selling. It is why we believe that the intersection of packaging and renewals is one that ISVs need to pay particular attention to going forward. This is not just about larger upfront sales but creating customer loyalty.

TMCnet: What you have described is a significant culture change on both the ISV and customer sides of equation. It involves not just new business models, but new ways of interacting with each other. How do you start the conversation to effectuate change?

Bloom: As with any proposed change, it is about the pitch and packaging of the value proposition. What we tell our clients is packaging is a way to standardize business processes, sales, implementation, etc.  It is all about more efficiency and accuracy and the benefits of standardization benefits.

When talking to ISVs on the benefits of a SaaS solution, it is clear that the ability for the large software houses to simplify their sales processes, has become too complex and sales people have trouble navigating what to offer and how. It is a real sea change when the discussion they can have with their customers, thanks to flexible packaging and pricing, is about bundles and turning on or off features rather than about all of the discreet software solutions in the portfolio. Plus, they can tout the fact that implementation costs are vastly reduced, compliance issues should disappear, and updates and being current can be accomplished more easily and frequently as well. This obviously is a benefit on the fact that development costs are greatly reduced when an ISV only has to produce one version. 

We also like to point out the low variable cost in changing packaging in this type of environment, and like to show management that there can be an increase of average revenue per user without having to make a major change in the product line-up. In short, it is about packaging and marketing, and getting rid of custom negotiations.

TMCnet: How about a few final thoughts.

Bloom: One of the biggest benefits of going to a SaaS approach is the ability not just to do bundling to meet the needs of specific customers and do it quickly and easily, but also to avoid a huge problem that has plagued the software industry for a long time on the packaging front. The tendency has been to over-stuff different releases of software on the part of vendors. This creates ill-will with customers. They don’t like paying for what they don’t use, or having additional training costs and update delays because some new feature they may not want or need is being added to a product or service.

As I said, it introduces a lot of totally unnecessary cost and complexity into the development cycle and complicates, in a very significant way, the vendor/buyer relationship.    

The importance of packaging is to create competitive advantage for the vendor and improve operational excellence, which translates into competitive advantage for the licensees.  Since we are still early in the transition process to a more software-centric and cloud-based world, leveraging licensing to provide better and more agile packaging is going to be critical in making sure the transition goes smoothly. 

Edited by Maurice Nagle
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