Cloud Vendors Beware! You Now Own a Share of Your Customers’ Risk

We love talking with cloud software sales professionals. They are always excited about the big deal they are chasing and how they are going to win a new account. Even (or particularly when) they face a lot of competition, their faces light up when they are talking about landing the new customer. Their energy is contagious.

And if you want to wipe the smile off their face and bring them back down to earth, all you have to do is ask them about their customer renewals.

In recent years, software sales professionals give an almost universal reaction when asked about their customer satisfaction and retention: They get quiet, and the blood drains from their faces. We consistently hear things like, “We are great at winning the initial sale, but lose a lot of customers at renewal time” or “I spend so much time trying to resolve customer problems that I can’t focus as much as I should on winning new business.”

Does this sound familiar?

Shifting user adoption risk from the customer to the vendor

An unintended consequence of cloud software is the transfer of IT adoption risk from the customer to the vendor.

The subscription software model, with low up-front costs and fast deployments, is very appealing to new customers. However, software vendors are just starting to realize the hard truth that if customers are not using the software – and getting clear and measurable business value -from doing so, they will not renew their subscriptions.

Prior to cloud-based subscription software, organizations had large up-front expenses to buy (not rent) software. The vendor received their profits up-front, and the customer bore the full risk and burden of user adoption. The customer had large sunk costs, and they were often unwilling to incur another sunk cost to replace a system that was underused.

Not anymore.

Cloud-based subscription software – with pay-as-you-go pricing – has reduced barriers to entry when it comes to acquiring new software. After all, renting inherently carries less risk than owning. But much to the chagrin of cloud software providers, it has also lowered the barriers to exit when it comes to leaving vendors.

Cloud vendors are just starting to feel the pain. And it’s going to get worse.

Cloud vendor profits require long-term customer renewals

The cloud-based, subscription standard has changed revenue models forever. With the model’s low up-front payments from the customer, cloud vendor profits now hinge on both customer volume and retention. Maximizing the number of paid licenses has always been vital to success, but now the key to sustainably increasing profits is retaining the customers over the long-term. It’s all about a customer’s lifetime value, not just what they paid this quarter.

Unfortunately, many cloud vendors focus primarily on new client acquisition, all the while losing revenue out the back door when customers leave. This is unsustainable. After all, it costs more to acquire a new customer than to retain a current one.

Customer renewal is heavily dependent on customer usage

It’s simple: Customers don’t renew cloud subscriptions that are not used. Have you (or one of your friends) ever bought a gym membership at the start of the year with great hopes for going on a regular basis? How long did it take until the regular workouts gave way to other things? How long did it take until you (or your friend) realized that you were not getting any value from your membership fees and you just dropped your membership?

The same thing happens with cloud software. If customers aren’t using the system, they are not renewing it.

Software companies focus on building and implementing software, not ensuring IT user adoption

In short, software companies are not equipped to drive IT adoption.

Compounding the challenge for cloud software providers is that IT adoption is a people and organizational problem, not a technology problem. The core capabilities and expertise of most software vendors lie in their technical expertise. Quite simply, they know how to make great software.

What they don’t know how to do is help people and organizations manage change. The skills, methods, knowledge, and abilities you need to help people adopt and sustain new ways of working are vastly different from those needed to design, develop, and enhance great software.

Limiting IT User Adoption Risk for Cloud Vendors

Simultaneously, cloud vendors are starting to realize that while they now bear the brunt of the IT adoption risk once borne by their customers, they are not equipped to manage that risk.

It’s now showing up in the bottom line: Standard point-and-click training isn’t sufficient for addressing customers’ IT adoption needs – or the cloud vendor’s risk. After all, training focuses on the software, not the “fleshware,” or the change the new technology brings to the customer’s organization.

To fill this critical service gap – and the hole it’s drilling into profits — increasingly, software vendors are partnering with third parties to fill the critical service gap and deliver the capabilities customers need to manage organizational change and sustain IT user adoption. Success Chain is one of those organizations that can help. We focus on the people and organizational issues, so you can do what you do best – develop software.