“A key concern holding many businesses back from changing their revenue model is a fear of the immediate consequences these can cause”
Digital transformation is radically disrupting almost every sector, across all business units, writes Jamshed Khan, VP, Cloud Protection and Licensing Activity, Thales.
In fact, a quarter (27 percent) of business executives now believe that successfully transforming themselves is a matter of survival, and almost all (84 percent) are already adapting their revenue models for software.
But why move to software-centric model at all?
Thanks to the standards set by disrupters such as Amazon and Uber, customer expectations have accelerated as they see the benefit of services that are personalised and predictive, building an altogether better experience. These expectations are being felt in the business space too, where digital transformation is arguably having an even greater effect.
This is particularly true of organisations that have traditionally created and maintained hardware products, as they radically transition to software-centric ones. Some organisations, such as those in manufacturing, are taking a leaf out of consumer-facing businesses’ books and have begun offering software services and subscriptions alongside – and even instead of – hardware.
This is giving customers the ability to pick and choose the parts of an offering they want, better suiting their needs and saving money on purchasing entire packages.
But with these changes, come new considerations and challenges. If an organisation no longer defines success by pure sales, how should they define the value of their propositions? What is involved when moving from a hardware to software model, and how can they ensure that they provide enhanced offerings at the same time as keeping reliable revenue flowing?
From Redefining Value to Reinventing Revenue
When moving to a software-centric model, the first step for an organisation is understanding the changes that need to be made to existing offerings. For example, if it already creates software packages, it may need to find ways to license individual parts, rather than selling it as a whole. The value of the software will now be defined by its accessibility, utility and relevance to an individual user – and these criteria may vary from customer to customer.
In addition to this, many organisations’ structures will have to change. Where before there was an internal structure designed to deliver new products to market – from planning and development through to manufacture and sales – software subscriptions exist in a continuous cycle of updates and improvements.
This not only requires a change to the internal structure of a business, but also alters how it determines the value of its services, which are no longer sales led, but instead based on customer retention.
To ensure this transition is smooth, organisations will need to consider how they licence software, add value, and price their services competitively. Companies need to deliver the software in a way that customers expect, and quickly.
Moving to Predictable Revenue Models
A key concern holding many businesses back from changing their revenue model is a fear of the immediate consequences these can cause. Adobe, for example, experienced a stock dip when it first transitioned to a cloud-based software model, and concerns of similar incidents are restricting businesses.
However, redefining value is one of the biggest strengths of software. Adobe, thanks to its confidence in software offerings, not only recovered but now generates more revenue than ever before.
It’s not just software giants that are undergoing these changes – Philips Medical transitioned from producing medical equipment to digital services to keep up with the growth of data and demand for flexible services in the healthcare industry. The difficulty for organisations adopting a software-centric model is emphasising the retaining of customers, rather than one-off sales, and creating a stable, predictable revenue model.
Fortunately, software provides many ways for organisations to deliver this. It can be delivered across multiple platforms, such as the cloud, customers are always able to download updates – improving their loyalty and retention, as they don’t feel stressed or inconvenienced.
Additionally the nature of cloud software means it is much easier for a business to issue updates or new features to customers, who will be able to access them almost instantly. This improves a business’ value proposition over hardware, as it can be updated much quicker and more easily than before. For a business embracing software-based offerings, these measures will help to create more predictable revenue streams, as customers become incentivised to stay and earnings will remain stable.
The sale of software is now a major part of the successful digitalisation of many industries. With increasingly competitive markets, organisations need to find ways to differentiate their product offerings in ways that give customers added value. Software-centric models can also help cut costs for businesses and customers by ensuring services only charge when they are needed, rather than on a subscription basis with regular charges or a large upfront cost.
By adopting these models, organisations are ensuring they are not only more efficient and cost effective, but able to make the most of new revenue streams in the future.