Product Management: Perpetual to SaaS

In today’s product management world, you can’t just be a product expert. You need to be an expert on your business model to know the world in which you are building products. In other words, you should be able to carry a conversation with your CFO. Furthermore, you will face these questions from recruiters during job interviews. This is very important in the world of software, especially with recent changes to the landscape of subscription businesses.

From the beginning, enterprise software transactions were friendly for vendors. For example, clients would be locked into perpetual license agreements. As a result, vendors received significant revenue up front – and customers assumed all of the risk. In other words, the customer is stuck with the service even if something goes wrong. The vendor always received guaranteed revenue – plus 20% maintenance fees on top of the initial investment.

As you can imagine, gross margin in this model is very high. However, it’s difficult to maintain sales momentum to drive growth. For example, you may be growing at double-digits for five years when you acquire new customers. However, at a certain point, the number of available customers will start to level off. As a result, product management teams need to stay on top of sales. The key is deeply understanding your buyer and watching for market shifts, while paying attention to your competition.

Unfortunately for vendors, the terms for agreements have completely moved away from the original model.

Instead, the SaaS model (“service as a subscription”) is the standard for today’s subscription service. Unlike original enterprise agreements, the vendor assumes all of the risk. For example, customers can sign up for monthly or annual subscriptions with much easier exit terms. As a result, the gross margin is much lower and you need to have much more capital available in order to continuously acquire new customers.

In summary, subscription models have shifted from being very vendor-friendly to being much more customer-friendly. On the product management side, you may be wondering why vendors have moved to this model given all the risks? Ultimately, our most important job as product managers is to always have our customers in mind. The shift to SaaS is making our business customer-centric rather than vendor-centric. Most importantly, it’s not all bad news for the bottom line. We just need to think differently about cultivating our customers.

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About the speaker
Karl Rumelhart Gainsight, Karl Rumelhart Member

Karl Rumelhart is the Chief Product Officer at Gainsight. Karl is responsible for the product roadmap for Gainsight’s customer success platform. Karl has held senior product and marketing roles at VMware, leading product management for VirtualCenter and driving the acquisition of SpringSource. Karl has also run product teams at Jive and predictive analytics at Infer. Prior to his software career, Karl was an academic mathematician, lecturing at Stanford University after receiving a Ph.D. from Harvard University.

About the host
Randhir Vieira

Randhir Vieira is the VP of Product at Headspace - leading the product team to achieve the organization’s mission of improving health and happiness around the world. Prior to Headspace, Randhir was the Chief Customer Officer at Mindflash, a leading cloud-based Learning Management System. He was also the VP of Product and Customer Care at Eyefi - and Senior Product Director at Yahoo.

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