As we enter 2009, I am hoping that the economic environment will begin to improve for technology firms.  I realize that very few analysts feel positive about the economy but one thing I agree with them is that companies will have dramatically less capital to spend on technology in 2009.  Forrester states that IT spending growth will only be a pathetic 1.6% and Gartner’s Peter Sondergaard, Senior VP of research, thinks that 2009 IT spend could be 2.3% to no growth at all.

What is interesting is that what growth there is, Software-as-a-Service will be one of the top spending market segments according to reports by Verizon and Gartner.  The reason for the optimism is primarily because these types of types of technology investments can lower a company’s total cost of running their business.   This relates to my last blog post that TCO is going to be the major driver for technology buyers in 2009.

My prediction for 2009 is that this will be the Year of the Subscription.  Not that subscription-based business models are anything new, just think about the next time you pay a bridge toll, your mobile phone bill or your mortgage.  The reason for my prediction is that companies are now faced with a once in a generation restriction on capital and companies are thinking more about reducing costs and how to make these technology purchases using their operating budgets.  With this focus on operating expense purchasing by buyers, this will place tremendous pressure on technology firms that only sell their products through a traditional capital expense model.

Here are some simple tips to get your technology business leverage a Subscription business model:

If you are an Existing Technology company with little or no recurring revenues:

• Evaluate your business for ways to provide new subscription products, services or content to your existing customers.
• Offer a subscription pricing option to new customers that have a capital budget constraint.
• Add a premium support option that can be priced as a subscription upgrade to a customer’s existing maintenance or support offering.

If you are a SaaS company then you should consider:

• Re-evaluate your pricing and packaging strategies to maximize your competitive advantage against traditional competitors. Now is a great time to grab markeshare.
• Focus on customer satisfaction because the only weakness in a subscription model is when your customers don’t renew their contracts.  Keep your renewal rates up and look to up-sell at renewal time.
• Be very clear on your company’s recurring revenue metrics; customer acquisition costs, lifetime value of you customers, and customer profitability, to name a few.  You should then develop specific plans to improve and monitor these metrics on a monthly or quarterly basis.

Keep in mind that even though this will be a difficult year, but there is always opportunity in a chaotic market  for innovative companies.  Remember 2009 is the Year of the Subscription.

Remember the good ol’ days of selling software, when you could talk to customers about the virtues of ROI, or Return on Investment?  ‘Our new software can cut your costs by 90%,  make you more strategic and you will get that raise you were looking for!’

Funny thing, that was only about 6 months ago. Even Software-as-a-Service sales professionals were skilled at ROI selling but now ROI is out and TCO, or Total Cost of Ownership is back in.

The reason for the change is that buyers don’t care about investments or benefits, they are only concerned with reducing  and managing costs.  So this should be really good news for SaaS providers because their solutions not only provide ROI but clear TCO advantages.  Some of these advantages include:

• No hardware required: web servers, application servers or firewalls
• No software required: database, infrastructure or security software
• No IT team required: DBA’s, IT managers, security guys, etc.

It seems like most companies have already thinned their workforces, frozen their budgets and trimmed unnecessary spending in an effort to reduce costs.  What you are going to see next is IT Cost Swapping.  This is when you start doing a line item review of all of your IT and business costs and realize that your customer is probably paying a huge amount annually for ERP maintenance to your friends at Oracle and SAP and not getting much in return.  In a recent CIO magazine article about the upcoming SAP maintenance fee increase from 17% to 22%, a Forrester survey of over 200 SAP customers found that over 85% saw little or no value in these annual fees.  So it is a stroke of genius to raise the costs as the economy goes into the toilet, right?  Well SAP isn’t alone, Oracle is also planning on a large price increase in 2009 which could be as large as 10%.  In fact Oracle said that their maintenance revenue was the most profitable component of their business, that’s because it’s pure profit!

A smart Cost Swap Strategy could involved a portfolio analysis of all of your customer’s ERP software and building a plan to replace older on-premise ERP products with up-to-date SaaS products.  The advantage with this approach is that your customer can get the benefits of modern software, while actually reducing their overall IT cost structure.   For more Cost Swapping ideas, drop me an email at: kevin@montclairadvisors.com.