Today, in every enterprise company, there is a discussion about the shift to a Software as a Service (SaaS) delivery model and the shift toward a subscription revenue model. Those two discussions are critical for design teams to understand and to use as a way to help drive a better focus on user experience in these companies.
Successful design teams are the ones focused on how design can contribute to and better facilitate the continued delivery of better customer and business outcomes.
The shift to subscriptions, in particular, is a critical one. Companies manage that shift carefully because it has critical implications to revenue, future growth, and in the case of public companies, to the stock price.
- The shift to SaaS is a delivery-model shift. This shift transformers the way companies work and deliver software and how end users can quickly onboard and use that software.
- The shift to subscriptions is a business-model and revenue recognition shift.
So what do these shifts mean to designers and enterprise design teams and what can they do about it? In this post, I’ll focus more on how the shift to subscriptions shifts enterprise design work.
The shift to subscriptions
In my experience, design teams get the shift to SaaS and in many ways, welcome it. Despite the challenges of shifting the way we work, it is within our immediate circle of influence so it is easier to understand and in many ways, address.
In many ways, however, the shift to subscriptions is a more fundamental shift that can help design teams contribute better. That said, many design teams either ignore or fail to participate effectively in that shift. This is especially true if those teams are far removed from the business context and discussions.
The way revenue is measured and recognized can create a multiplier effect within companies and can shape how companies really work and what they really care about. Design teams need to focus on how revenue is recognized and how they can help contribute to the growth of that revenue. They can do so by focusing on delivering better experiences that customers love and want to use, not software that users have to use.
So what does this shift from a perpetual licensing business to a subscription-based business actually mean?
In a perpetual licensing business, an enterprise company sells their software to a customer based on the capabilities of that software with a multi-year licensing deal. This means the customer purchases the right to use that software for an average of 3 years based on a multi-month sales cycle. The sales cycle (or the wine and dine sales cycle) generally involves an analysis of that software, an overall set of discounts and pricing adjustments based on the customer size and need, and discussions with the buyer persona, not the end user. The revenue of that sale is immediately recognized regardless of the way that software is consumed. In other words, if after buying that software, or suite of software products, the customer ends up consuming that software less or more than expected, the sale has already happened and revenue has already been recognized. The next time this conversation happens is at renewal 3 years later.
This means a few things:
- Customers demand a higher clearing bar of features they need because they need to be able to depend on your software for years to come.
- Customers have a vested interest in making this software successful after it’s been purchased because, for the lack of other terms, they’re stuck with it for a while.
- The buyer is incentivized to make the most of their purchase. This means they’re willing to create education programs and multi-week software deployment cycles to make sure they get the best out of their 3-year purchase.
In a subscriptions business, an enterprise company sells their software on a subscriptions basis to a customer. This means they are subscribing to use the software on (generally) a monthly basis. Although many companies sign multi-year subscription deals, the revenue of that deal is only recognized on a monthly basis when the software is actually consumed. This is why consumption of the software, not just selling it, becomes critical. This is why cloud companies even compensate their sales force for a commission based on consumption and not on the pure value of the original sale.
This has a few key implications:
- Initial time to value becomes a critical metric to success. What’s your five minutes to wow? How you can get a customer onboarded and using your software has true revenue implications, not just experience-related ones.
- Time to value in every part of the journey becomes critical. How you get end users to want to use your software and get value out of it continuously so they’re counted as active users becomes critical.
- Churn and monthly renewals become critical. The 3-year renewal conversation is a now monthly conversation of the real value your software is providing and the chances that other pieces of software (that are also easy to onboard onto) can provide instead.
- Diversity of personas becomes critical. The more personas you’re able to serve in an organization the “stickier” your software is and the more likely your consumption numbers will grow because your value in the organization is growing. This is what some organization might call “landing and expanding” within an organization.
- Sales teams incentives are more aligned with customer incentives. Sales teams are no longer pushing for the most amount of features possible to close a single sale because closing a sale does not necessarily mean a high immediate commission. Sales teams have a vested interest in the software being consumed in the organization they sell to in order to recognize their consumption-based monthly commission.
- You are in a perpetual cycle to delight customers continuously. Delight gets a bad representation in design because many designers talk about it with the context of small visual-based features. Real delight in enterprise software is about getting your work done with clarity and quickly.
- And more …
What can design teams do about the shift to subscriptions?
If you are a design team in an enterprise company. Your moment has arrived. This is why enterprise companies are expanding their design teams and design leadership team rapidly. Design is now at the center of this movement and it is up to designers and design leaders to capture the momentum of the moment to provide value.
First, you need to learn the business “lingo”. You need to understand the underlying details of the shift to subscriptions. You need to get a better sense of what terms like Annual Recurring Revenue (ARR), Retention, Churn,Time to Value, and more mean. Not only from a customer or design sense, but from a business sense. You need to get a deeper view of the finances of your company. Remember that last company all hands when the CFO jumped on the call to explain the details of why the business is either thriving or not? That’s important. Don’t skip it, ask for more details. Talk to the sales organization about their compensation plans, to the customer success team about customer onboarding, and listen to analyst questions about your last company’s quarterly earnings. You do not need to get a business degree in the next few weeks, but if you’re going to capture the movement of that shift, you’re going to need to have a surface level understanding, at the least, of the dynamics of your company’s business and in some cases, your customer’s business.
Second, orient your metrics and your contributions towards those shared customer and business metrics. What is this experience you are delivering going to do to drive initial time to value? Continued time to value? Consumption numbers? You need to shift your focus from the delivery of the design team to how design can help deliver shared customer and business outcomes. There is no other way to be successful here.
Third, you need to think end to end. Delivering delightful user flows isn’t as important as delivering delightful end to end experiences that deliver customer outcomes. What capability are you delivering to customers and what problem are you solving for them? The sign up flow isn’t a problem customers want to solve. Doesn’t mean you don’t focus on it, it means you need to understand how that fits within the broader big picture of the capability you’re delivering to customers.
In other words, there is a huge momentum here for you to help drive within your company. That momentum can only be captured by shifting the focus of design teams from the details of the craft alone to how design can participate in building an experience-led organization and how design teams can help facilitate delivering valuable experiences to customers.
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