Q&A: The perpetual customer engagement model explained
The channel is changing. Big bang licences and service deployments are making space for subscription customer relationships. Rather than sell big, you sell consistently through subscription models and support for customers, who in turn benefit from continued innovation and attention.
This approach engages economies of scale and makes it easier for companies to retain customers for far longer.
Yet while exciting, it can also be a confusing and risky change for channel companies that don't know what to expect - primarily if they rely on vendors that don't help with adopting this emerging business model. What should you know about the shift to a service-centric, subscription-styled approach? What are the benefits and challenges, and what can you expect from your vendor partners?
Sage is among the vendors adapting to this new market approach, reinventing itself to enable direct channel customers. We sat down with PJ Bishop, Vice-President: Services for Africa and Middle East at Sage, to unpack the perpetual customer engagement model.
Let's start by asking who should care about this concept?
If you sell technology services to customers, you should pay attention to this change. In this conversation, I'll focus on business partners such as independent software vendors, value-added resellers and implementation partners. But if you sell technology to customers in which you charge a hefty initial fee, then take smaller payments for annual licences or something to that order, you should care about this change because it will affect your business.
What is the appeal of this new model?
To appreciate the shift, we should weigh perpetual versus subscription models. Perpetual licences are annual and require a high up-front cost. Channel companies normally prefer perpetual licences because they receive significant income on one transaction. However, customers normally purchasing these licences are wary of them as these are expensive and tend to have hidden costs, such as maintenance, support, upgrades and annual renewals.
On the other hand, a subscription licence asks for a much smaller but recurring fee covering all the previously mentioned services. Subscriptions are also much easier to allocate on a per-user basis. Paying companies prefer this as they get better visibility and control of costs and derive more value from a licence.
So, customers like subscriptions. But do channel companies benefit?
Yes, they do. From a channel supplier view, the benefits come down to chasing the lifetime value of a customer. In the past, we have seen how a perpetual licence is sold to a customer that had smaller subsequent fees, such as for support. This, in the long run, is ineffective as the relationship tends to fizzle out, or a customer may only be likely to hear from their salesperson when targets need to be met.
Now, the focus is on customer lifetime value, retaining them for long periods while helping them maintain and change the services as their operations change and grow. It helps make customers stickier, and channel businesses can walk with their customers through changes.
Is this an alternative to procurement and traditional licensing?
Those types of business models still have a place. But the perpetual customer model is starting to dominate for several reasons.
First, it works very well with cloud delivery methodologies. Second, it emphasises business relationships and not just sales volumes, which fundamentally alters what customers expect from the channel.
Third, it provides opportunities to embed with customers, to become their technology guardian angels, so to speak. And last, though there are many more arguments for this change, the ongoing decentralisation of technology services has grown incredibly as companies created operational continuity during the pandemic.
This sounds like something for cloud-native businesses. Is that accurate?
It may look like that, and certainly, the partners with a grasp on providing cloud-based services fit into the model more easily than channel incumbents.
But we've brought legacy partners along this journey. The challenge is not so much technology but understanding how the shift impacts your business revenue. If you are used to selling perpetual licences upfront for a lot of money, you need to anticipate changes to your cash flow. You also need to understand how to adapt your customer service and how to measure customer satisfaction.
You must look after three fundamentals in this model: managing customer churn, net incremental increase in annual recurring revenue, and net new customers.
These ask a lot from a company, and they are unlikely to just cut off current revenue streams. The point is that someone has to help them make the transition, correct?
Yes, and that someone should be the vendor. In our case, Sage is changing from perpetual licences to cloud-based services that use subscriptions to create recurring revenue. So we had to change to make this approach work, meaning we learned a lot along the way. Our responsibility is to create frameworks and discover models that our partners can use to change their business models. I'd say that if you are engaging with a vendor not willing to do that heavy lifting with you, you have the wrong partner for this transition.
And it goes further than adopting a new business model. There are great ways to manage clients in this new approach, such as analytics models to predict churn or even their next requirement. It's exciting stuff, but you can be overwhelmed. So if your vendor partner wants you to work more closely with your customers, that vendor should treat you the same way.
The advantages include scale and closer customer relationships. Are there other reasons to consider the perpetual customer engagement model?
The one feature that has me excited is that you work with a community of partners in this model. For example, we provide a marketplace in which different providers can play to their strengths. You might be excellent at understanding financial systems, but your customer needs specific integrations that you don't focus on. No problem - on the marketplace, you can find a specific integration solution that is small and specialised but precisely what you need.
Rather than build it all yourself, or in the case of Sage, build it all ourselves, the point is to leverage different partner services. Perhaps you are good at CRM, but your customer also needs a stock management integration. You can use the service from another marketplace partner, and everyone takes a relative share of the subscription.
So you can deliver what your customer needs without going outside of your comfort zone?
Exactly. And rather than get slightly more money from five or ten customers, now you can get perpetual revenue from dozens, maybe even hundreds or thousands of companies. Explore Sage partner programme opportunities here.