Transition to SaaS with Case Studies of Autodesk and PTC
“ Lower, read the book Subscribed and tell me what should a software company know when planning on the transition from perpetual license base to SaaS.” my boss hands me the book and said.
Big topic! But I’ll try to systemize the surface of this topic so my boss could easily starch (yes, the surface). Here is what I plan to go through:
Transition to Business Model of SaaS
1. Service: Define Our Service, Than How to Profit
2. Business model: Method of Accelerating Revenues are Different
3. Financials: Income Statement and 5 Common KPIs
4. Sales: 8 Process to Transfer Sales to Subscription
5. Case study of Autodesk
6. Case study of PTC
1. Service: Define Our Service, Than How to Profit
As cloud computing progressed and users’ data bursts, software companies are able to optimize user’s digital experience with the data collected and provide services base on a cyclical dynamic relationship with users. Under these circumstances, the best business model to profit is to “bill when users are having the service”, which is subscription, since the service we provide could ensure customers are always having the optimized version, they will stick to us and billed more after on.
To transition to SaaS is not simply changing the billing method from once to annual, but to ensure service cycle continuous so that customer never stops billing. Hence, this is why we should first focus on what we want to provide then think of what method profits the most.
2. Business model: Method of Accelerating Revenues are Different
Here I’ll simplify two business models in software companies into formulas so that we could understand the difference between how to accelerate revenue in two models:
Model 1: Purchase once (Perpetual license):
(new customer x list price) + [old customer x maintenance x (1-churn rate)]
key to accelerating revenue:
1. Generate more new customers since the list price is often larger than maintenance. 2. Decrease churn rate by making every upgrade worth for client to pay maintenance.
Model 2: Purchase the right to use for a certain period (SaaS):
subscription fee x [new customer + old customer x (1-churn rate)]
key to accelerating revenue:
1. New and old customers now are equally important, so we should monitor the cost we got customers instead. 2. Decrease churn rate by maintaining good relations with clients and increase the cost of clients to transfer to competitors’
Here again, we could see that the SaaS model demands high connections with our customers, and the only way to do it is to know them well.
3. Financials: Income Statement and 5 Common KPIs
Income Statement: ARR, growth expense, and recurring expense
When it comes to revenue and expense in the income statement of SaaS, a company should turn to focus on “Annual Recurring Revenue, ARR”, which is the total amount expected to receive from subscribers annually as revenue. As for expense, it could be separated into two, growth expense and recurring expense. Growth expenses are those spend to expand the business, which means sales and marketing expenses. The rest of the expenses are recurring expense, which is spent to maintain operations, including COGS, general administration expense, and R&D investment. The book Subscribed suggest a 50/50 in two expenses to ensure the growth of the company, and here is how others performed:
5 Common Financial KPIs
Besides income statement, there are also 5 common KPI that companies should monitor when transitioned to SaaS:
- MRR/ ARR (Monthly/ Annual Recurring Revenue)
MRR = subscription fee x [new customer + old customer x (1-churn rate)] - ARPA/ ARPU (Average Revenue per Account/User)
ARPA = ARR ÷ total customer - Churn Rate: Churned customer in a certain period.
Churn Rate = Churned customer ÷ Total Customer - LTV (Lifetime value): Expected lifetime revenue from each customer.
LTV = (ARPA x %gross margin) ÷ %Churn Rate - CAC (Customer Acquisition cost): Cost for company to acquire a customer.
CAC = Annual sales and marketing revenue ÷ Annual new customers
KPIs above monitor the gain and loss of customers, revenue, and cost generated by customers. For churn rate, industry average lies between 10–15%, smaller than 10% would be considered a great performance. The calculating lifetime value of individual customers could define which customer is valued more. Calculating LTV to CAC ratio could compare the cost spend on a customer with the lifetime revenue they are going to spend on us, usually, a ratio of 3 performed well, and there is even a company with a ratio of 7–8.
The method to evaluate whether a transition is successful is to see whether the lifetime value of a customer is the same or even higher after the transition. Meaning: LTV of old model = LTV of the old model, Perpetual list price + Annual maintenance ÷ churn rate =< Subscription Price ÷ churn rate after the transition
4. Sales: 8 Process to Transfer Sales to Subscription
Here, forgive me for not retyping everything list in the flow chart above. In the initial stage of transferring, monitoring 5 common KPIs is extremely important. In the meantime, lunch subscription base products as a test product and find relations between churn rate and subscription fee could help to seek the right balance to maintain customers while charging them with the right amount.
Case Study
I choose Autodesk and PTC as case study targets since they have different transition strategies that are worth digging into. When it comes to the initial stage of transition to SaaS, Autodesk stops selling most of their perpetual license, while PTC decides to keep the perpetual license business running. Their strategy reflects on their revenue in the early stage of launching, which I’ll point out in the following.
5. Case Study of Autodesk
Timeline of transition
2020.8 Announce off-shelf multi-user subscription program in 2022.8
2020.8 Announce not to provide maintenance from 2021.8.7
2020 Change from account system from serial no. to naming system
2017.6 Lunch program to transfer maintain customers to a subscription
2016 Stop selling most of perpetual license
From the bar chart above, we could find revenue shrinks in 2017 due to a huge decrease in perpetual license revenue, but subscription revenue soon catches up in 2018 and exceed revenue in 2016.
Change with Channel Partner
In 2020, Autodesk owns 1500+ channel partners and resellers, 70% of revenue comes from channel partners and within it, 35% comes from their biggest channel — Tech Data Corporation, 10% from their second-largest channel — Ingram Micro. Hence, here is what Autodesk did during the transition:
1. Educate channel and reseller on how the subscription model works.
2. Share user’s data with channel and reseller.
3. Package product billing term by referencing channel and reseller’s performance evaluating system.
It is essential to consider every business stakeholder when planning on transition.
5 Common KPI apply to Autodesk
From the table above, we could see average revenue per user increase by year, but customer acquisition cost also increased. However, since churn rates in the recent 2 years are not provided, it is hard to see whether the lifetime value of the customer had exceeded the cost of acquiring one.
Learn more from Autodesk investor relation official website.
6. Case Study of PTC
Timeline of transition
2019 Subscribers account for 85% of total users
2019.10 Off-shelf perpetual license in all regions and options for long-term subscribers to cancel the subscription in a year
2018.10 Provide long-term subscribers one year limit to cancel subscriptions
2018.1 Off-shelf perpetual license in America and Europe
2015 Lunch subscription service, but still keep options for a perpetual license
Compare to the revenue of Autodesk, the revenue of PTC does not suddenly shrink after launching the subscription program in 2015–2016, but the growth rate of subscription revenue does not increase as of Autodesk’s.
Subscribers account for a big portion of PTC users, however, the ratio does not reflect on revenue. In 2020, 85% of PTC users are subscribers, but only 51% of revenue is base on the subscription program.
For the churn rate of PTC, it remains a ratio under 10% for 4 years, and the churn rate also different by product family.
Conclusion
In the book Subscribed, more dimensions of business view are provided through all departments’ points of view, including R&D, IT, marketing, sales, product, and financial. Here in this article. I only mention 4 of them. Transition to SaaS is a huge procedure that will spend time planning, setting a milestone of each stage, adapting new financial models, adjusting organizations, and separating customers.
In 2018, Garner Consulting predicted by 2020, all new entrants and 80% of historical vendors will offer subscription-based business models. Now in 2021, I am sure 80% of business existing business thought of the subscription model, but I wonder how much of them execute to transit, and how much adapt it well.
