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Moving from Perpetual to Subscription Pricing - What is the expected ratio

We are evaluating moving our current pricing from a perpetual license model to a subscription. Our subscription offering is not cloud based, it is still installed at the customer location. Assuming the perpetual license is competitively priced, what is the expected ratio of the Perpetual price (w/o maint) to the annual subscription price (includes maint). I've heard between 2:1 and 2.5:1. Any experienced advice on this?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Rich,

When I last ran through this analysis, I ended up in the same place; 2 to 2.5. But, that's not a straight ratio. That's how long it takes for the sub revenue line to cross over the perpet revenue line.

What I do is to build a simple model looking at:
-Revenue
-Acquisition cost (think sales).
-Retention cost (cust service and sales).
-Install cost (engineering, mostly)
-Revenue growth (additional perpet licenses, additional sub seats).
-Perpet maint, and related churn.
-Subscription churn; both yours and your customers' perception of their likely churn rate.
-Quote to cash cycle variation (I find subscription a bit easier generally, but often this isn't the case, so you need to map this)

You want your crossover to be less than 2.5 years, typically. Contrarily, the customer will want something that is more than 2 years. If the customer thinks they may want to cancel after the first year, then you can price subs higher and not risk pulling them in under 2 years, for example.

KP

Topic Expert
Jeff Chase
Title: Advisory CFO
Company: Hazelcast, Juicebox Energy, and Social I..
(Advisory CFO, Hazelcast, Juicebox Energy, and Social Inertia ) |

I agree with the 2 to 2.5 range ratio for this, 2.2 seems to be a sweet spot. The move to subscription and away from perpetual is a great move for your company.

Whether you are cloud based or on premise, your moving to subscription pushes you towards SaaS type offerings, which means you need to start to consider all SaaS type metrics too, Keith alludes to this above.

There are so many useful metrics in building out your business as you move to more of of a Saas model. I would encourage you to check out http://www.saastr.com/
to learn more about SaaS engagement and metrics and what other SaaS startups are doing, they have become the defacto blogging site in this space now.

There are a lot of go to gurus in this space, I've enjoyed Bessemer's white paper on 10 rules of cloud computing as a great place to start.
https://bvp.app.box.com/10lawsofcloudcomputing

This is a much better way to building a lasting and profitable business, increasing your valuation, congratulations on making the move!

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