Engineering.com TV report face to face with PTC CEO Jim Heppelmann brings a crash course of subscription business. Mr. Hepplemann speaks about SaaS business fundamentals such as revenue, booking and how it will make a future PTC profit.
All of this is to explain why having an outstanding Q4/2016 led to declined revenues.
“Business is great. We are kicking butt,” Heppelmann said in today’s TV interview, adding that, “Revenues, profits and the market cap are growing. PTC had an absolutely unbelievable fiscal year in 2016.” In light of this sales success, it is somewhat paradoxical that PTC’s total revenues “formally” declined in FY 2016.
Listening to Mr. Hepplemann, PLM business is doing great and it is just a matter of switching from one accounting method to another. However, as many companies learned, subscription business brings risks that software companies never seen before. And the name of the game is churn. If you’re not familiar with what is “churn” you better do, since it is becoming one of the most important parameters that can give you a sense of how successful is subscription business.
Your churn rate is the amount of customers or subscribers who cut ties with your service or company during a given time period. These customers have “churned.”
I recommend you to read the following article, which is one of the best to understand subscription business – Managing Customer Success to Reduce Churn by David Skok.
The health of a SaaS business is directly tied to its ability to retain its customers and prevent churn. To do this, they have to ensure that their customers are happy. That means making sure they get the promised business benefits they signed up for. When the business is small, the amount of money lost due to churn is only $3m. This is not so serious, and can be fairly easily be replaced with new bookings. However, as you see in the right hand pie chart, when the company gets larger, the amount being lost to churn becomes huge. Finding an additional $30m in bookings just to stay at the same revenue level as the previous year is a huge problem.
PLM has a bad record for up-selling additional services and products to manufacturing companies. Usually PLM was sold as a big project that took long time to implement and to bring to production. However, as we can see form the following picture, up-sell is one of the most interesting potential to scale SaaS business.
So, most of subscription PLM businesses today are like a startup. And it raises actually few important questions. In the past customers were locked into perpetual PLM licenses. To switch PLM was almost unimaginable tasks. Not anymore. Subscription business makes it much easier. Also companies are ditching “single vendor models”.
And a second part of the same article was actually the reason for that. It speaks about Aribus PLM story. In fact, it speaks about future strategy of Aribus, which is multiple PLM systems. Aribus is also bought a substantial number of Aras seats. Here is the passage:
Generally, Romare says that Airbus doesn’t believe in one big PLM system. Instead, he talks about “building blocks” based on a solid foundation consisting of a PDM backbone such as PTC’s Windchill and Dassault Systèmes’ CATIA V5. With 60,000 engineers and product developers, harmonization and the importance of people following predetermined processes mean new technologies can’t be adopted too quickly.
You also bought a substantial number of Aras seats. Aras is a PLM system, but you use it for the supply chain? “That’s right, we don’t use it for the core enterprise PDM system,” asserted Romare. “Due to the size and complexity, we have many small and light PDM systems, as we tend to call them. There can be various types of systems integrating the supply chains, and a test environment where we need light PDM functionality. We have tested and proven the Aras solutions with good results, flexibility and quick turnaround time to develop and deploy applications.”
In my earlier article last year Product Innovation Platform: single vendor mousetrap and agile services I was sharing my thoughts about future trajectories of PLM platforms and SaaS services.
The value of vertical integration and all-in-one approach is clear. Products are tuned to work with each other. Data transfer is smooth, compatibility between products is validated and guaranteed by a single vendor. But it is kind of mousetrap and I know many companies that don’t like to be dependent on a single vendor. If platform is represented by a set of services, that can be combined with services of other platforms, then the value of integration is not that high and buying separate software components and licenses will be a way to go.
The idea of cloud-based services is good and following modern micro-services architecture approach. The real check is to insure how services can interplay and work together in a real life. A good platform will provide enough information and support to insure services are documented, supported and maintained – this is one of core elements of successful platforms. Such platforms can become a good foundation for future PLM subscription business business.
What is my conclusion? Customers are looking how to get out of a single vendor mousetrap. Subscription services is a way to do so, at least from a financial standpoint. PTC story sounds fascinating and it Jim Hepplemann sounds very convincing in his story of turning booking into revenues. As much as PLM companies have an ability to lock customers into long term relationships, this math will work. However, PLM companies should think how to fight customer churn in their subscription business, especially at the time, business will start scaling. It can disrupt future subscription revenues. Just my thoughts…
Image credit For Entrepreneurs blog
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Disclaimer: I’m co-founder and CEO of openBoM developing cloud based bill of materials and inventory management tool for manufacturing companies, hardware startups and supply chain. My opinion can be unintentionally biased