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Selling software on a term license/subscription basis

saas accounting rulesI am working with a company that is considering selling software on a subscription vs perpetual license basis and need some help from those who are selling or have sold on a subscription basis

1) What is the term for the sale? 
2) Experience with renewals at the end of the term
3) How do customers pay? 
4) Sales quotas and commissions; how is this treated?
5) Do you think selling on this basis increases customer adoption
6) Issues I should be thinking about

Best

Joan

Answers

MarieLaure Leglise
Title: VP Finance
Company: Everbridge, Inc
(VP Finance, Everbridge, Inc) |

Hi Joan,

I work for a SAAS company - (Software as a service) and we invoice on a subscription basis - Here are some comments to your questions:
1. I assume by term you mean length of the "period invoiced"? It can really be whatever your business model calls for. I have seen yearly invoicing, invoicing for "multiple years" of service - some companies invoice more frequently (Quarterly or even monthly).

2. It is all about service... SaaS companies look for a yearly renewal of at least 90% - this might apply to your client

3. Not sure what you mean?

4. You usually have two sorts of quotas and commissions - one type is for "new business", the other one is for "renewal" business - in our company we have two different commission plans. For accounting purposes, commissions are recognized over the life of the contract.

5. Not sure.

6. As mentioned above, selling software on a subscription basis is all about service - your client will have to make sure that they have a strong structure in place to provide services.
You also need a good software to deal with revenue recognition because that can become overwhelming very fast - we use Netsuite to do the "Rev Rec" and are very happy with that software.

Hope this helps.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

MarieLaure

Thanks for responding. I just want to clarify your comment regarding quotas. It looks like you have a quota for new business and a quota for renewals. How is the commission rate calculated and how does the rate for new business compare with the rate for the renewals (for example is it set at a percentage of the new rate). When are commissions paid? I have seen a portion paid upon booking and a portion paid upon collection.

Joan

Topic Expert
Mark Sphar
Title: Chief Accounting Officer
Company: Veracity Payment Solutions
(Chief Accounting Officer, Veracity Payment Solutions) |

Joan,
Few comments on your questions above. Have sold both SaaS/subscription models as well as perpetual models.
1. Term under SaaS - Typical one year minimum. Could do monthly, but you typically want a chance to get them hooked before they have the opportunity to turn it off. There is not much for them to invest if they are only on the hook for one month.
2. Renewals at end of term - I suggest you have an automatic annual renewal in place. Require a 60 day notification if they don't want to renew. Most people forget this. Becomes a mgmt decision on how to proceed once they pass this deadline.
3. Assume you are asking about credit cards or P.O.'s. If you are thinking about accepting credit cards, post that question out here separately. This is something I tend to shy away from. Depends on volume really. I have used Google checkout for lower volume deals because they then assume all the compliance risk. Payment types really depend on your customer base.
4. Agree w/ other posts here on commissions. Depends on your desire for sales reps. Do you want them selling new business, or servicing existing business. Comp them on what you want them focussed on. Commissions being paid out over the term of the contract can get tough. I typically pay out commissions the same way I get paid. Paid up front = commissions up front. I also give quota credit the same way...= to cash.
5. I think this depends on the market you are selling to. My experience tells me that larger corporations don't buy into the SaaS market (with SF.com being the exception) as much as everyone originally thought. My last company offered to sell both on subscription and perpetual and <5% took the subscription route.
6. Agree w/ making sure you have an adequate system in place to handle. This depends on your volume. If you are high dollar/ low volume, then a specific ERP system to administer may be overkill. If you are high volume, then you should definitely look that direction. Good luck.

Kurt Gruner
Title: Corporate Controller
Company:
(Corporate Controller, ) |

Joan:

I also have experience with subscription-based revenue models for software companies... for #3, I think you are asking how customers are billed? Typically, customers will pay on an annual or even a monthly basis for access to the software, depends on how your billing systems are constructed.... for #5, customers like the subscription model because it prevents the big outlay associated with a perpetual license, and allows the freedom to migrate to a different platform or even another product rather seamlessly.. I don't have statistics available, but I know what our customers told us, and certainly the increases in subscription revenue for my companies bore that fact out...

Hope this helps.

-Kurt

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

I really appreciate feedback that I have received. Thanks to all

Joan

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