As many organizations look to transform to a recurring revenue model in order to improve revenue predictability and reduce financing stress, there are factors that should be taken into account in order to make a smooth and successful transition.
While many understand the economics of hardware, when you move to software it becomes a different story. I believe many businesses, including those who manufacture machines, can move to a recurring revenue model but today I want to explore the factors a company needs to consider from the perspective of a business that builds and sells traditional on-premise application software. There are a number of examples of great success in transforming from a traditional business model to a subscription-based model.
The Seven Cloud Computing Business Models – where do you fall?
I’ve outlined seven cloud computing business models that cover every business model from the traditional software models (Model One) all the way up to the Internet (Model Seven). I welcome Avnet partners to check out my Cloud Computing Training Series on the Avnet Knowledge Network for the complete overview of these models, as well as much more about the cloud and how to leverage cloud services.
Of those fundamental business models that detail how organizations deliver cloud services, let’s take a closer look at these three (refer to the virtual training series for the complete lecture):
- Model Four: Hybrid – Offering to manage your traditional on-premises application software as an additional fee to your traditional Model One business.
- Model Five: Hybrid+ - Offering to sell your traditional on-premises application software as a cloud service on a monthly or yearly basis.
- Model Six: SaaS – Offering new application cloud services engineered to only be delivered as a cloud service.
If your software was never architected to be delivered as a cloud service, you have the option to standardize the management and monetization of it using a Model Four (Hybrid) or Five (Hybrid+) business model. In these models, your application sales reps continue to sell the software and support as they would in a Model One (Traditional) business.
However, in Model Four or Five, you’re able to offer to manage the application and the underlying software and hardware for your customers. Be sure your R&D team standardizes the hardware and software stack, as well as the management of the security, availability and performance of the application. Model Five (versus Model Four) is merely a different pricing model that states that if you don’t want to pay for the software up front, you can package and deliver it for a per user, per month price.
Getting to the model that’s best for your business
Both Models Four and Five have been used by a number of different companies. During my time at Oracle, we pioneered the early versions of this, but as I said, many different companies have accomplished the expansion from a Model One to add either a Model Four or Model Five business. One option might be to utilize the business Model Four with your install base of customers and offer them a high value, high margin service for additional value.
Another possible option is to acquire Model Six companies. Model Six companies engineer their applications to be delivered only as a cloud service. Oracle, for example, has acquired a number of these companies including Netsuite, RightNow, Taleo and others. SAP has purchased Successfactors and Blackbaud has been acquiring companies for the past several years, including eTapestry, Kintera, and Convio. All of these acquisitions are examples of a Model Six business being added to a Model One business.
Want to learn more about the seven cloud computing business models? It’s all covered in Chapter 1 of Avnet’s seven-part Cloud Computing series on the drivers and business models for the Cloud.