Ten Steps to Optimizing Your Software Licensing Revenue

Executive Summary

Today’s global technology marketplace is challenging, competitive, and dynamic. In response to these market conditions, technology vendors are re-thinking their business models and product strategies. There are no textbook examples of business success that demonstrate the value of complacency and inertia. It is instead properly focused and well-executed change that empowers organizations to achieve superlative performance during periods of market upheaval.

If you’re a intelligent device manufacturers, an attractive business transition strategy is to move into the software business by becoming more software-centric in how value is delivered and monetized. By delivering more value to your customers in the form of software, your company can increase margins, build competitive differentiation and recurring revenue streams, more precisely target multiple market segments, and dramatically increase customer satisfaction. Cumulatively, these advantages can have a substantial—and even transformational—impact on your company’s bottom-line business performance.

So how can your company become more software-centric? How can your company leverage software to drive revenues, efficiency and flexibility? How can it most effectively reap the rewards of software-based revenue streams, while avoiding the risks associated with entering a new business?

Based on our experience helping many of today’s leading technology vendors successfully move from an exclusively hardware-based model to one that optimizes software revenues, Flexera Software has developed a practical, proven approach for such a transformation:

  1. Socialize and build consensus for the transformation
  2. Understand software licensing methodology and its uses
  3. Determine appropriate compliance policies and enforcement mechanisms
  4. Understand the difference between delivering hard goods and digital goods
  5. Understand the software value lifecycle
  6. Instrument business processes to support the value lifecycle
  7. Implement a customer self-service portal
  8. Define and execute a software product management and go-to-market strategy
  9. Implement appropriate sales training and compensation policies
  10. Report, review, and respond

By following these ten steps, your company can build a thriving software business, even if it has never licensed or monetized software before. And, by doing so, it can more adaptively compete in a global marketplace where customer requirements and expectations are constantly changing— and where rapid responsiveness to those changing requirements and expectations is essential for long-term business growth.

Why Software?

Before outlining how to you can optimize the performance of your company’s software business, it’s a good idea to review why it’s to your advantage to focus on software in the first place. For starters, you probably already deliver a lot of embedded software in your device to make it fully functional. Here are some of the main reasons to shift your strategic focus to software and to monetize that investment:

Greater Lifetime Customer Revenue

When you deliver value to your customer in the form of software, you can create recurring revenue streams that improve your company’s top- and bottom-line performance. You can do this through subscription licensing, maintenance/upgrade fees, usage metering, or any other appropriate model. So instead of just being limited to onetime hardware purchases, you can build multiple (and fairly predictable) sources of ongoing annuity income.

Better Alignment of Product Feature/Cost with Target-Market Customer Requirements

When you focus on delivering product functionality as a set of software entitlements, you gain much more granular and flexible control over how you package and sell that functionality. So you can efficiently create lower-end products at lower price-points, mid-market products at moderate price-points, and premium products at higher price-points—all with the same basic code and hardware. All you change with each different product is which software capabilities you license to the customer.

The Advantages of “Try-Before-You-Buy” Sales

By enhancing your control over software license rights or software entitlements (the customer’s right to download, use, and update software), you can also boost sales and shorten your sales cycles with a “Try–Before–You–Buy” model. Under this model, you can allow prospective customers to try your products during a trial period—while ensuring that they will not be able to continue using the product if they don’t purchase the necessary software licenses.

Easier Cross-Sell and Up-Sell

A software-centric product model also eases cross-selling and up-selling, since customers can immediately activate newly-purchased product capabilities by simply entering a license key. You can also offer these capabilities on a “Try- Before-You-Buy” basis to overcome customer objections, just as you would with an entirely new product installation.

Streamlined Distribution with Electronic Software Distribution-Enabled Self-Service

It takes time and money to pre-configure your hardware devices with the right software. With the right approach to entitlement management, on the other hand, you can quickly and easily drop-ship devices—and then allow customers to retrieve the software they need via a selfservice portal for electronic software distribution (ESD). This cuts your costs and improves customer satisfaction.

Accelerated Revenue Recognition

Under an exclusively hardware-centric business model, the revenue on any given sale can be substantially delayed by the process of building and shipping units for freight-onboard (FOB) invoicing. With software, on the other hand, you can often recognize revenue shortly after an order is placed by simply providing customers with access to your software and any associated license keys.

Embrace Virtual Appliances and Cloud Computing to Enter New Markets

If your software can run on standard enterprise computing platforms, you can enter new markets by licensing it to run on your customers’ virtual machines and/or internal cloud environments. This gives the customer the benefit of a lower cost—since they eliminate hardware-related expenses— while preserving your profit margin. Software-only solutions can also be delivered under a software-as-a-service (SaaS) and/or external cloud model, which represent a rapidly growing worldwide market.

The above is not even an exhaustive list. By provisioning your devices with software or offering stand–alone software solutions, you can more quickly bring new capabilities to market, leverage your technical advantages through a wider range of OEM licensing relationships, and more flexibly enhance your own product offerings with the intellectual property of your partners and suppliers.

Together, these business advantages build a very powerful case for becoming a more software-centric company and in some cases making the eventual move to a software-only company to deliver value to customers.

Ten Steps to Optimizing Your Intelligent Device Revenue Using Software

While a shift in business strategy to a software-centric value proposition offers numerous advantages, it is not easily accomplished. To optimize the results you achieve from such a shift—and to avoid the mistakes other companies have made as they have similarly transitioned their business strategies—it is important to follow a proven, practical process.

Based on the experiences of other hardware manufacturers, there are ten specific steps that you should plan on making to ensure the success of your own company’s transition to software sales. These ten steps are:

  1. Socialize and Build Consensus for the Transformation
    The transition to a more software-centric company can be a challenge—and will require collaboration from all areas of your company—so it is important to get everyone on board before undertaking the initiative. Everyone should be educated about the advantages your company is pursuing, so they have a clear sense of why the effort involved is worthwhile.

    The people who will be required to participate in the process should also have ample opportunity to voice their concerns and objections. By clearing the air and ensuring the entire transition team is on the same page, you can make sure that personal reservations don’t derail your effort once your initiative is underway. This consensus-building can also better ensure that department managers are, in fact, committing the resources that you will need later on in the process.

This is an excerpt. Download the entire pdf: Ten Steps to Optimizing Your Software Licensing Revenue