A Hybrid Strategy for On-Demand Success
Software vendors should deploy a hybrid model in order to ensure a successful transition to on-demand pricing.
By Timothy Campbell, Steelwedge Software
Nov. 28, 2005
Venture capitalists and pundits are bullish about the potential of the on-demand model; in fact, many VCs now require that a company have an on-demand model before they consider making any investment in the company. As a result, CEOs are scrambling to develop an on demand model strategy to complement their traditional license model.
A pure on-demand model can be extraordinarily taxing, particularly during the first three to four years of a software company's go-to-market phase. This is because time-to-cash is significantly longer in the on demand model, leading to higher cash burn rate issues. With the size of investment rounds from VCs getting smaller, such models become very difficult to sustain.
As a result, it is almost an imperative that software companies pursue a hybrid strategy, going to market with both on demand and license models, which provide the broader market access and appeal of the on demand model, while also delivering on the operational benefits of the license model.
After having been CEO or general manager of three on demand companies, I have learned something about what it takes to drive the hybrid strategy until a company reaches critical mass.
First, let's define and differentiate between the two models. In the on demand model.
A pure on-demand model can be extraordinarily taxing, particularly during the first three to four years of a software company's go-to-market phase. This is because time-to-cash is significantly longer in the on demand model, leading to higher cash burn rate issues. With the size of investment rounds from VCs getting smaller, such models become very difficult to sustain.
As a result, it is almost an imperative that software companies pursue a hybrid strategy, going to market with both on demand and license models, which provide the broader market access and appeal of the on demand model, while also delivering on the operational benefits of the license model.
After having been CEO or general manager of three on demand companies, I have learned something about what it takes to drive the hybrid strategy until a company reaches critical mass.
First, let's define and differentiate between the two models. In the on demand model.
- Customers pay for product use on a periodic subscription basis without a long-term commitment (typically 12 months or less of a contractual "rental" commitment).
- Customers may also pay a one-time set up fee.
- Each customer is on the same product version, and a tight new-product release framework ensures simultaneous migration of all customers to new product versions.
- Often a "partner ecosystem" exists, which include third-party vendors offering a composite application to provide a complete solution to a niche market, or service providers with cost-effective implementation and configuration services and/or consulting to create custom reports.
- In order to keep subscription revenue flowing, the vendor must ensure that the software is used and adds value to the business.
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