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In December, I wrote a post titled Give Your Sales People All The Knives. While I let you draw whatever conclusions you wanted from the post, I thought I’d follow through and give you a little more detail about what I meant by the statement.
I framed the problem with the struggle many software companies have been going through over the past few years (or decades – depending on who’s version of history you believe) around selling perpetual licenses vs. subscriptions. I inadvertently included the construct of the deployment model (desktop, server, or SaaS / hosted) which, while a key part of the evolution of the software business, was not the part of the problem I was referring to when I suggested you should give your sales people all the knives.
A few people wrote me concerned that I was suggesting that the sales organization should determine the deployment model and that I was suggesting a company shouldn’t differentiate between desktop, server, or SaaS. Don’t be concerned about this – it isn’t my argument or suggestion.
Instead, I’m focused entirely on the licensing and pricing model (which I’ll simply refer to as the “licensing” model – which includes price.) I’ve been in more conversations that I care to count about how to price software, regardless of the deployment model. The licensing model and the deployment model inevitably get tangled up when they shouldn’t.
In 2009 (and going forward) customers will buy software using both perpetual licensing and subscription licensing, regardless of how the software is deployed. In addition, customers will buy perpetual licenses but pay periodically (monthly, quarterly, annually) and customers will buy subscription licenses but pay in single payments up front. If you can parse all of that, this is the exact opposite of the theory of how the software licensing and deployment were intended to line up. Of course, this is nothing new as software leasing has been around since the beginning of the software business, as have prepaid services.
While I know all of this gives the auditors great pleasure because it means they get to spend more time lecturing companies about revenue recognition and enforcing accounting policies that distort the true financial picture of the company under the guise of complying with GAAP, it’s irrelevant. Your goal as a company is to create great products that your customers will pay you for. The goal of your sales organization is to sell these products; they shouldn’t care how the customer wants to license the products.
That’s the essence of what I mean by Give Your Sales People All The Knives. While it makes good business sense to have a religious point of view about the deployment model (there are fundamental differences between a SaaS deployment model and a software license / behind the firewall / on premise / whatever you want to call it deployment model), customers buy each deployment model a variety of different ways and your licensing model should accommodate.
I regularly hear the argument that the economics aren’t the same. Baloney – they are approximately the same. A typical perpetual model is $x in year 1 with 0.2x in year 2 and year 3. A typical subscription model is 0.4x in year 1, year 2, and year 3. Tweak this however you’d like; you get a roughly equal cumulative payment stream over four years. I understand the cost of capital argument – you’d rather get the money up front, but remember that some customers want to pay for the subscription model up front (three year pre-pay for the subscription – or a single check of 1.2x) while others want to pay for the perpetual model in equal payments over three years (0.467x / year).
Cash flow follows this logic. The customer wants to pay in different ways to manage their cash flow. Some want to pay monthly; some quarterly; some annually. The deployment model doesn’t matter; the license model doesn’t matter – how the customer wants to pay is what drives this.
Fundamentally, the customer is managing two things. First is cash flow. If the customer has a use it or lose it budget, they want to pay now. If they have no (or minimal) budget but really need the software, they want to pay monthly and try to bury the expense in a cumulative budget, or get a budget exception for a small monthly payment. Second – and more subtle – is how the customer accounts for the purchase. Many companies (whether they should be or shouldn’t be) want to capitalize the software purchase and put it on the balance sheet to manage short term earnings, especially in down markets. Others are perfectly happy to have the purchase be an income statement item. The two issues drive customer purchase behavior much more than your licensing model does. As a result, I’m suggesting you should set up your licensing model to be flexible to accommodate your customer’s needs, rather than the other way around.
Bottom line – if you make software for a living, regardless of your deployment model, you should be able to provide either a subscription or perpetual licensing model, with any type of payment approach.
Many companies have only been giving their sales guys the brown handled knives (e.g. they are limited to using one type of licensing model.) Selling software into a downturn is always harder. Now is the time to give your sales people all the knives. If they don’t carve up enough business, they’ll at least have enough knives to put themselves out of their misery.
As Q408 stumbles to a close, I’m seeing a distinct trifurcation of sales performance among the companies I’m working with. I’m pleasantly surprised by the companies that are solidly outperforming their Q4 plan, especially since Q4 is the hardest quarter to outperform (since the plan is now typically great than 9 months old.) Some are fighting to get to their Q4 plan and some are going to fall short regardless of what they do between now and the end of the month.
This is in direct conflict with what you might think if all you do is read the newspaper and watch television. If this is your information base, you’d conclude that no one could possibly have a successful Q408. Not true!
That said, in all of the companies I’m involved in, people are being very cautious about Q109, even in the ones that are outperforming Q408. Anyone who has ever played the MIT Beer Game understands how multi-stage supply chains can mess with your mind (if you don’t have any idea what I’m talking about, grab three friends and play the online beer distribution game.) Every startup is now living in an extreme version of this with a severe bullwhip effect.
Sales organizations – and decision making around them, especially in the forecasting part of the cycle – are especially susceptible to this phenomenon. Since most companies are now working on their 2009 plans, paying special attention to this on the top line is especially important this year. While talking through this at one of the SaaS companies I’m involved with, I made the comment "give your sales people all the knives."
In the software business, we’ve been struggling for the past few years with the transition from traditional perpetual software licensing to subscription based licensing. Layered on top of this is the split between desktop software, server-based on-premise software, and SaaS-based software. All are valid deployment, sales, and pricing approaches although on some days of the week you’ll notice that religion takes over, especially when VCs tell you "we only are funding SaaS-based software companies" or "enterprise software sales is dead." Ok – whatever.
My solution is to give your sales people all the knives. I’ll be more specific in another post, especially since it won’t really matter this quarter. In the mean time, go play the beer game before you finalize your operating plan.
A CEO friend (who also is an excellent salesman) sent me a fun post titled Sales 101 with the comment "here’s one that will make you laugh in a sad but true kind of way." Yup – this pretty much sums up the dark underbelly of high tech sales. If you are a VP of Sales in a high tech companies, read slowly and see what you can do to improve the situation.
I got the following email on 1/25/08. The Subject Line was "Naming Bathrooms."
My name is A, and I am a Cadette Girl Scout who is selling cookies to fund my dream of becoming an astronaut. This upcoming summer, I am returning to Huntsville, AL, for Advanced Space Academy, an opportunity offered through Girl Scouts. I am not sure if my dreams will take me to ATLAS at CU (my dad is a professor there), or Cal Tech (and the Jet Propulsion Lab, where my dad is on sabbatical), or even to MIT, where my dad went to school (Course XVI, 1978-1987).
My mom says that it is too bad that MIT did not accept your naming a bathroom offer — she thinks that you should have offered to build more women’s bathrooms at MIT as they can be somewhat hard to find when you need them. She also says that while the Sloan School and other east campus buildings had adequate facilities, you had to plan carefully if your work took you to the Humanities or Science Libraries.
I am writing to ask if you would like to make a contribution of $2008 to help me attain my goal. This translates to approximately 618 boxes ($3.25/box), of which there are eight available varieties. Of course, that might be a lot of cookies, even if you distributed them amongst all of your companies’ employees as a business expense. Instead, we can donate boxes to your choice — EFAA, the local food bank that was started in 1917 to help the families of World War I soldiers in Boulder, or directly to our soldiers overseas.
The 2008 cookie campaign is now taking orders with the cookies due to arrive in mid-February. I would enjoy discussing this with you further (I have prepared a presentation as to how businesses can use Girl Scout Cookies). You may reach me at myemail.com or my phone numbers, 303.xxx.yyyy (cell) or 303.aaa.bbbb (home).
If you decide that your 2008 charitable support does not include Girl Scouts or that you have a Girl Scout who is already your supplier, thank you. I would appreciate a reply regardless of your decision.
I thought this was absolutely brilliant. I responded with:
A – thank you for writing me! I’m a big fan of the Girl Scouts and one of the organizations that I’m chairman of (the National Center for Women & Information Technology – www.ncwit.org – which is based at CU in the ATLAS building) has a partnership with them.
While I’m not interested in buying $2008 worth of cookies, I would be willing to buy 24 boxes (three of each type.) Tell me the best way to coordinate this with you.
My cookies showed up today and I got to meet A. She’s a neat young lady in high school who is learning to sell at a young age. Awesome. Her parents (I got to meet her mom also) should definitely be proud of her.
A humorous view on sales executives.
My apologies to all my friends that are in sales. I love each and every one of you. (Thanks for the link Tim.)