Lessons in resilience from the software industry
We are in unprecedented times. The world as we know it–our way of life, our relationships, our businesses–everything has changed. The global economy is reeling with uncertainty and companies everywhere are grappling with what this means for their customers, employees, and businesses.
In a way, these are truth-telling moments for businesses. Amidst all the chaos, after the initial reaction, a crisis offers us opportunities to question and reimagine. They clearly show us what’s working and what isn’t–what our customers truly value and what they can do without. Most importantly, they underline the fact that to be successful in the long run, businesses need to build resilient business models and operations that can withstand market upheavals.
During the last two recessions, I worked as an Analyst at IDC where I was responsible for data modeling and forecasting of software industry revenues. This included the revenue trajectories for both traditional software (perpetual license and maintenance), and SaaS (subscription). I currently work with Zuora, a SaaS company that offers order-to-revenue solutions for subscription businesses where I am the Chair of the Subscribed Institute, a think-tank for Subscription Economy executives.
While the past downturns were clearly caused by different factors, one can find familiar patterns to help software companies navigate the current crisis. Based on my learnings, here are a few things for companies to consider:
Subscription business models are built to weather economic storms
“PTC Says Business Model Meant To Withstand Events Like Coronavirus” reads a recent news headline. The business model making headlines is the company’s recurring revenue model. It’s common knowledge that businesses with a recurring revenue model have the advantage of predictability. They are able to start every quarter with an established customer base and contracted revenue, and are able to withstand economic fluctuations better than companies that have to acquire a new set of customers and find new revenue streams every quarter.
Look at how this played out during the last two downturns. It was during those dark days that we saw the SaaS business model emerge and eventually dominate the software industry. The recession-induced inflection points completely turned around how the industry operated as the advantages of selling subscriptions over perpetual licenses became evident. In addition, while the ongoing costs of managing traditional software were unpredictable, the costs of SaaS were much more transparent and therefore easier to budget for.
The financial model offered by SaaS was part of the appeal. Perpetual software licenses require large upfront capital outlays, as well as large internal IT teams to manage on-premise systems. At a time when capital budgets were slashed and teams were being reduced in size, prospective customers shied away from the commitment. SaaS offered the ability to access software functionality via recurring operating costs. But the financial model wasn’t the only reason that SaaS companies not only survived but in fact thrived during the past two economic downturns.
Digital models provide advantages for customers and businesses
The fact that SaaS applications are delivered and constantly improved via the cloud played a key factor in growth. Subscription customers want ongoing value, and SaaS companies deliver on-demand innovation, via the cloud. This ensures that customers always have access to the most secure, up-to-date software available.
Before times of economic duress, the risk of running your business in the cloud seemed too much to bear for some companies. But during the crises, the risk of high and unpredictable capital outlays, out of date software, lengthy implementation projects, or lack of automation further turned the tide toward SaaS.
The current environment is also making a strong case for digital businesses and ongoing value. Most product companies are experiencing a massive supply chain disruption. Their customers are facing the certainty of product obsolescence, machines that need physical maintenance that is proving to be hard to provide, or broken parts that can’t be easily fixed or replaced. If instead of relying on physical features and distribution channels, companies evolved their products through software that could be updated via the cloud, they could provide ongoing value, and set themselves up to be much more resilient in the face of this kind of global disruption.
Look ahead and focus on innovation
Having a recurring revenue financial model by itself does not guarantee business success. The subscription model is fundamentally built on ongoing innovation. During times of market turmoil, most companies make the fatal mistake of cutting back on innovation. But it’s relentless innovation during an economic recession that led to the birth of companies like Adobe (1982), Zuora (2007), Twilio (2008), Nutanix (2009), as well as paradigm-shifting innovations such as the Apple iPod (2001). Now is the time to double down on your customer relationships and do everything you can to provide more value and meet their evolving needs.
As we try to get through these uncertain times, companies from every industry must forge forward keeping in mind the learnings from the past.