Written by @Gabe Weisert.
PTC (Parametric Technology Corporation) is a computer software and services company headquartered outside of Boston, Massachusetts. Founded in 1985, PTC makes a wide variety of CAD and design programs for the industrial manufacturing industry, particularly around the field of connected devices. PTC’s customers design aircraft, plan buildings, make sneakers, build tools, pioneer new medical diagnostic technology, and much, much more.
A few years ago, PTC found through its own survey analysis that more than 90% of its customers shared a desire for subscription based pricing. The company decided to implement a broad, systemic shift to its business model from perpetual licenses to cloud-based subscriptions. Last November they announced three strategic imperatives: maximize long-term shareholder value, expand margins, and convert to a subscription business model.
So far they’re three for three. In their last public investor call, PTC announced that in Fiscal 2016, after implementing Zuora’s subscription management platform, customer adoption of subscriptions accelerated every quarter, far surpassing their goals. Based on their current course and speed, they expect to achieve 65% subscription adoption in Fiscal 2017, and 85% in Fiscal 2018 resulting in about 95% of their software revenue in Fiscal 2021 being completely recurring.
PTC’s subscription ACV (Annual Contract Value) numbers are similarly impressive — guidance at the beginning of Fiscal 2016 was $43 million. PTC delivered $114 million, almost three times that original target. Their original subscription mix target was 25%. They ended up doubling that, at 56% customer adoption rate. No wonder that IDC is projecting that the subscription-based SaaS delivery model will significantly outpace traditional software product delivery, growing nearly five times faster than the entire software market and accounting for $1 of every $5 spent on software by 2018.
While Adobe’s successful transition to a subscription model has generated many headlines, PTC is shaping up to be the next poster child for a major enterprise moving to a cloud-based, recurring revenue model. In its public discourse, the company cites four primary advantages for large enterprises shifting to subscriptions: flexibility and scalability, lower upfront costs and predictable budgeting, the ability to rapidly launch new features and product bundles, and the agility associated with a cloud-based IT environment.
Let’s break down all four areas.
FLEXIBILITY & SCALABILITY
Business growth is never fixed. Go-to-market plans may yield entirely unexpected results, requiring reevaluation, reprioritizing, and restructuring. The needs of the customer are constantly changing. It’s myopic to think that one’s business model is impervious to shifting trends.
Subscriptions allow companies to scale up capabilities in real-time accordance with specific needs. Should you find that your business is thriving and you’re able to take on more capabilities, the door is open. But should you decide that you have taken on too much, and projections indicate a potential risk down the road, just scale down. The subscription-based system is flexible to your needs.
Perpetual licensing in the software or engineering sectors leaves much to be desired when it comes to this kind flexibility. You shouldn’t have to buy the platinum package of bells and whistles when you really only need a few bells.
PTC is incentivizing its current perpetual clients to move to subscriptions by eliminating previous support discounts, but they’re finding that the clients are mostly motivated by the freedom, flexibility and transparency that the subscription model allows. “Pay only for what you need” — this is what the subscription to services model is built on: flexible and scalable services in accordance to the specific needs of the customer.
As Beth Stackpole notes on the PTC blog, “Having access to subscription software that can be dialed up during peak periods and scaled back when times are slower is a huge asset for companies wanting to hone agility practices as a way to differentiate and bob and weave around the competition.”
LOWER UPFRONT COSTS AND PREDICTABLE BUDGETING
In the perpetual model, software and products are acquired in full each time a new update emerges. Significant upfront costs can be hard for small businesses, and budgeting is less predictable in that kind of environment. With a subscription model budgeting becomes far more predictable and transparent.
PTC is now offering subscription pricing across its entire portfolio of solutions and technology platforms. This system is instantly deployable, requires no hardware or operating system, is secure, and keeps costs low through the use of an operating budget rather than a capital budget.
PTC customers pay for what they use, scaling up if the need arises. Should they not require specific licenses, they don’t have to renew. Funds will not be lost on software purchasing costs, thus broadening their bandwidth of reinvestment for research, development, and manufacturing.
Subscription based services recognizes how important your time and resources truly are. Instead of giving you a prebuilt airplane, it offers you the building blocks to make the craft your company needs.
As Al Dean notes on the PTC blog, “The point is that cash-flow, just when a company needs it most, isn’t swallowed up by software purchasing costs. That extra financial bandwidth can be spent on other research, development and manufacturing activities just when its needed.”
ABILITY TO LAUNCH EXCLUSIVE NEW FEATURES, PRODUCTS, AND BUNDLES
As mentioned, PTC is a widely respected industry leader in the world of IoT and connected devices. Connected devices practically mandate some form of ongoing, subscription-based relationship, as products equipped with remote sensors allow for direct communication between physical environments and digital networks.
PTC customers can now analyze in real time the efficiency, accuracy, and economic benefits of their products. When updates arise, they are instantly accessible. PTC in return observes how their customers utilize their services, making the necessary adaptations to assure continued success and customer retention. PTC’s customer base now proxies as their R&D department, allowing them to rapidly iterate new products and bundles based on immediate, ongoing feedback.
PTC understands that todays customer wants personalized, real-time services that are scalable, instantly updatable, without the necessary burdens of hardware or licensing. This is a customer imperative shared by both B2B and B2C companies. These are the new table stakes.
As PTC’s Beth Stackpole notes, “As consumers in today’s mobile-friendly, app-centered world, we routinely download software tools when and where we need them without any thought to complex licensing terms or inconvenient maintenance contracts. It goes without saying that if it’s convenient to flip the switch on some new hot software capability for your personal life, the expectation is for a similar kind of seamless, pay-as-you-go experience when purchasing professional software.”
THE IT AGILITY OF THE CLOUD
Shifting to the cloud allowed PTC to rapidly reduce their application costs, so that savings could be reinvested back into the business. The secure infrastructure of their cloud-based technology allowed for more focus on personal business without the tumult of platform management.
Moving to a cloud based IT environment simplifies the overall workload of a company. There are less disruptions, meaning more engineers can stay focused on product, rather than home-grown billing solutions. The cloud itself is scalable, fitting perfectly into the overall subscription-based model.
As Al Dean notes, “[Subscription licensing] allows you to manage your software resources in the same manner that you do the talented folks sitting behind the monitor and driving the software. That means that when peak demand is there, seats can be added and used. Then of course, removed from that monthly, quarterly or annual cost when they’re not.”
PTC customers today benefit from lower administration costs, an environment that’s optimized by PTC solution experts, and the ability to respond even quicker to business initiatives. Plus, software upgrades are automatic and seamless. So they no longer have to budget for the next revision or skip versions to save money.
This article originally appeared in the Zuora Academy.
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