Software Monetization Featured Article

The Long but Rewarding Road to a Recurring Revenue Model

February 09, 2017

Trimble (News - Alert) Navigation is undergoing a licensing revolution as the company navigates its way through the digital transformation. Focusing largely on the transportation and logistics industries, Trimble specializes in positioning technologies including GPS, laser and optical and offers application software, services and wireless communications. As the company grows its productions and solutions, it is also undergoing a licensing evolution to ensure growth and cohesion between market strategy and back-office management systems.

Gemalto (News - Alert), a company specializing in software licensing and monetization, is helping Trimble with the company’s licensing evolution. The journey was recently documented through a LicensingLive event, “Crossing the Licensing Chasm – How to Transition to a Recurring Revenue Model Today.” We will be examining the topics discussed at that event through a three-part article series following Trimble’s journey as the company transitions to a recurring revenue model and examining some of the steps involved in achieving that transition.

Joshua Bloom, a partner with Simon-Kucher & Partners, is a leader with the company’s global software and internet practice. He has witnessed a variety of companies transitioning their revenue models and has observed several patterns that can benefit businesses interested in moving to a recurring revenue model for software monetization. Bloom said the company conducts a semi-annual survey of more than 2,000 companies about increasing pricing pressure and their responses. In 2016, more than 83 percent of companies queried reported increased pricing pressure, while 58 percent felt they were involved in a price war.

“Of those, more than 80 percent believe the other competitors started the price war, but that’s beside the point and in terms of price achievement,” said Bloom. “In terms of how much of your increase or uplift you’re trying to achieve year over year, you actually realize, it’s only a little over a third.  It’s the lowest number ever measured. So, these are pretty dire statistics about, kind of pricing pressure.” 

That pricing pressure is driving companies to think of new and better ways to monetize their offerings. Which often means transitioning to a new kind of revenue model and these days, recurring revenue is a good option for a variety of companies. The steps to adopting a new revenue model may be daunting for some businesses, but according to Bloom, there is a realistic and successful path to building out a recurring revenue model.

It’s important to examine company goals when changing a revenue model, and those generally mean acquiring more customers with a lower price entry point, as well as building awareness and traffic, and of course, monetizing and retaining the installed base through higher contract value and better service. Meeting these goals should realistically lead to revenue growth, and yet many businesses are challenged by how to approach this, particularly when some goals seem to be in opposition with other goals.

“We call that recurring revenue trade off and we like to look at it along three dimensions,” said Bloom.  “From a packaging perspective, you could stuff a lot of features into an entry level offering and offer more value for less and kind of focus on acquisition. Or, you could have a one size fits all and just have an enterprise license agreement and focus on monetization, but you wouldn’t get much in terms of customer volume.”

The same can hold true on the pricing side, where free or low commitment offers may lead to customer churn, versus trying to lock in customers. The reality is that these are inherent trade-offs that are sometimes necessary for building out a recurring revenue model.

“The companies that are most successful in building out recurring revenue models build out differentiated offers on top of a clear segmentation strategy,” added Bloom. “So, they are able to take packaging and say it’s not that we’re trying to figure out the one key package that’s going to meet all of our goals but we’re trying to create a packaging line up that speaks to different purchasers or different points in the customer journey. We’re looking at pricing models and trying to figure out what is the best mix of risk sharing models for the different segments we play in.  It’s okay if those are different for different segments and price levels.  It’s also okay to look outside the idea of just trying to get three to five percent increases from every single customer and really focus on value and use and understanding what’s possible on a specific customer.”

Ultimately, the path to a recurring revenue model has to be flexible and must take into account packaging, pricing and a variety of other metrics. Businesses will need to closely evaluate usage patterns, customer demand and their own speed to innovation and market to determine the right way to transition to a new revenue model. By taking a comprehensive and agile approach, businesses can stay on the right path and successfully transition to a revenue model that will better optimize and monetize their software offerings.

The full presentation of this discussion is available on LicensingLive. Stay tuned for additional articles discussing the exciting road to a recurring revenue model.

Edited by Stefania Viscusi