Description
Software businesses transitioning their customers from an on-premise or traditional licensing model to a SaaS (Software As A Service) model require specific reporting, revenue recognition, and planning capabilities in the CPM tool.
Example Use Case
Scenario: A large tech company is transitioning from its traditional on-premise software licensing model to a SaaS model. The management requires detailed reporting on various metrics such as revenue changes, user adoption rates, operational costs, and customer retention.
Solution: With the support of the CPM software's SaaS conversion reporting functionality, the company can successfully monitor the transition. For instance, it can track the change in revenue patterns, assess the speed of user adoption, monitor the operational cost changes, and measure customer satisfaction and retention throughout the transition.
Considerations
These models are usually transitory, meaning they are needed only as long as your company is migrating customers to the new SaaS model. If you plan to continue selling net new on-premise deals, make sure the model accommodates this as well.
See common areas of focus in the table below for this migration:
| Section |
Description |
| Revenue Recognition |
|
| On-Premise Licenses |
Traditionally recognized upfront at the time of sale. Account for any remaining revenue recognition from these sales. |
| SaaS Subscriptions |
Recognized ratably over the subscription period. Transition revenue recognition practices accordingly. |
| Financial Reporting |
|
| 1. Segmented Reporting |
Create separate revenue lines for on-premise and SaaS offerings to help stakeholders understand the revenue shift. |
| 2. Deferred Revenue |
Report deferred revenue for SaaS subscriptions, representing the future service obligation. |
| 3. Customer Acquisition Costs (CAC) |
Capitalize and amortize the costs of acquiring SaaS customers over their expected lifetime. |
| 4. Revenue Forecasting |
Incorporate separate forecasting models for on-premise and SaaS revenues, phasing out on-premise forecasts as customers migrate. |
| 5. Contract Liabilities |
Report any obligations or refunds owed to customers transitioning from on-premise licenses to SaaS. |
| Financial Planning |
|
| 1. Cash Flow Management |
Plan for the impact on cash flow due to the shift from upfront payments to recurring SaaS payments. |
| 2. Expense Allocation |
Allocate costs appropriately between the two models, considering the ongoing costs of SaaS vs. one-time on-premise distribution costs. |
| 3. Investment in Technology |
Budget for investments in cloud infrastructure and security, critical for supporting a SaaS model. |
| 4. Pricing Strategy |
Develop a strategy to encourage the transition, considering incentives or phased pricing. |
| 5. Customer Lifetime Value (CLTV) |
Recalculate CLTV for transitioning customers to reflect the SaaS revenue and cost structure. |
| 6. Break-Even Analysis |
Perform break-even analysis for the SaaS model, considering recurring revenues against service delivery costs. |
| Communication |
|
| Stakeholder Communication |
Clearly communicate the financial impact of the transition, including revenue recognition changes and cash flow implications. |
| Guidance |
Provide forward-looking guidance reflecting the SaaS business growth trajectory and transition timeline. |
Questions to Ask a Vendor
- Impact on Revenue Recognition: How does your system handle the changes in revenue recognition that come with a shift to a SaaS model?
- Ongoing On-Premise Sales: Does your product accommodate a mixed revenue model, where we plan to continue selling on-premise along with transitioning willing customers to our SaaS offering?
- Scenario Modeling: Can the product model different on-premise to SaaS pricing scenarios and impact over time?
- Specific Reporting: Do you include specific reports that address the needs in the table above?
