The Journey from Perpetual Licensing to SaaS
Lessons from the transition, and tactical tips for those embarking
As a tech CFO, pricing is one of the most difficult undertakings I’ve personally wrestled with.
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“It's a scary leap. It's like you have the safety harness on, which is this perpetual license thing, it's generating a ton of cash, you feel really comfortable about it, you're going to unclip from that and you're going to leap and try and grab the ledge on the other side.”
-Jim Caci, CFO of AvePoint
Moving from a perpetual license “box” software model to a “seat based” software as a service model is not for the faint of heart.
In the old-guard software world, companies like Oracle and SAP sold a “perpetual”, or lifetime, license to their software, and then later sold upgrades. In this model, customers paid for the software license up front, with a big cash outlay, and then typically paid a recurring annual maintenance fee (about 15-20% of the original license fee).
I worked at a software company in the late 2010’s that monetized the same way, until we underwent the harrowing journey from perpetual to SaaS licensing. As the leader of the FP&A group at the time, while doing a contribution margin analysis on each segment of the business, I thought:
“Holy crap, we're going to shut off this cash cow that we call the renewals team. I hope this goes OK…”
While I wasn’t the ultimate decision maker to go for it, we all felt like we were making a company-wide leap of faith, where everyone had some skin in the game.
And I truly mean company-wide, because it was much more than a simple change in how the sales team priced software to our end consumers. It was a fundamental change in how:
Engineers shipped software (faster release cycles)
Sales teams staffed (split by new sale, upsell, and renewal)
Accounting teams recognized revenue (recognized ratably instead of up front)
Accounting teams collected cash (invoiced upfront annually or monthly)
To elaborate on the last point, take it from Jim Caci:
“When you make that transition to SaaS, you go from selling a license where you collect all of the revenue upfront from that perpetual license. And now you're collecting a fraction of that.
Maybe in a yearly annual subscription, you're collecting a fraction of that upfront, so your cashflow completely flips and you're completely underwater on the new sales.
So for a company that’s self-funded, it can be a big challenge because your cash flow gets significantly disrupted and if you're trying to do that yourselves and you don't have additional outside funding, it becomes very difficult.”
The beauty of perpetual license sales is it aligns the cost of doing business to the underlying sale almost perfectly. Therefore, traditional software companies can get to profitability on the income statement faster in their lifecycles, with lower CAC Payback periods and bigger collections. On the other hand, SaaS companies need to delay longer term gratification (as shown below):
Instead, SaaS layers on “smaller” reoccurring contracts, which optimize for a customer’s lifetime value rather than pulling everything forward to take it in one big slug. And it literally looks like a layer cake - here’s what Slack’s SaaS ARR cohorts looked like when they filed their S1:
Perhaps the most famous journey from perpetual to SaaS belongs to Adobe. Razzak Jallow, current CFO of Floqast, was an FP&A leader at Adobe back in 2009 when they decided to change from perpetual to subscription.
His fingers were on the keyboard, driving the excel model used to take that leap of faith:
“I had the financial model for it. I was originally put in charge of how to forecast revenue better. I said hey look: units declining is a problem. We can’t ship software on time because we can only ship every 18 months in a perpetual model. I think we triple our share price if we move to subscription.
But it was just an excel model. The guts and foresight to actually do it from our CEO and CFO was really just amazing leadership”
In retrospect, the confidence to make that call back then can’t be understated. Analysts weren’t sure if this subscription thing was a fad, and many investors didn’t even understand the metrics you’d use to value a company like this.
“We had investors at Adobe who were trading us quarterly based on revenue. They had no idea what ARR was. If you said ARPU I bet they would have laughed. Our CFO said, this is the right thing to do for the customers, this is the right thing to do for the company. I’ll have to find investors who know what a subscription business is and what those metrics are”
-Razzak Jallow
And it worked.
Now, the process isn’t without its bumps and bruises. And the journey always takes longer than you think. It’s a multi year saga, not a one quarter “flip the switch” type of thing.
But it’s usually worth it - not only does your core business become more predictable, you also create compelling opportunities for upsell:
“For us, the perpetual license business was very lumpy, and we still obviously see some of that in the SaaS business, but when you get to the point where have this recurring revenue stream, you know, is much more predictable, highly scalable. And then if you're able to have a platform like we do where you're selling more than one product, it kind of benefits that aspect as well because you have the recurring revenue stream and then you have the opportunity for cross-selling other additional products. And so if you have that ability to do that within your company, then I think that just gives you a leg up”
-Jim Caci, CFO of AvePoint
SaaS is also an easier on-ramp for customers to try and commit later. Freemium and free trials are more prevalent in SaaS models, which are purpose designed for dipping your toes in the water from both a product, provisioning, and pricing perspective. And when customers do cut a check, it’s a smaller initial commitment. They think:
“Hey, it’s easier to give this a try. Maybe the cost is not exorbitant because I'm not buying this perpetual license kind of solution, I'm buying it on an annual contract. But obviously the long-term cost of that solution is probably higher than it would've been in the old world of perpetual plus maintenance. So that's the trade-off”
-Jim Caci, CFO of AvePoint
We’re about a decade in to companies making the transition from perpetual to SaaS - Rubrik recently spoke about the journey in their S1 statement. They started they journey five or six years ago, and are nearly done:
“Maintenance revenue associated with sales of perpetual licenses of our legacy CDM product decreased by $37.5 million, or 49%, in fiscal 2024 as compared to fiscal 2023”
It’s fair to say that most companies founded these days start as SaaS. But there are thousands of “legacy” software companies still out there yet to make the leap (believe it or not).
I’ll leave you with 8 tactical pieces of advice for those still preparing for the transition:
Implement revenue recognition software: It will need to support granular tracking of performance obligations under ASC 606/IFRS 15. Integrate your accounting software with your CRM and ERP to ensure accurate data flow and accurate revenue recognition. This will help in tracking performance obligations, customer contracts, and service delivery milestones. Software like Leapfin can help you consolidate all of your transaction data into standardized accounting records to accelerate month-end close.
Develop standardized contract templates: Standardize contract terms to simplify revenue recognition. Clearly define deliverables, subscription terms, renewal conditions, and any bundled services or products.
Automate Billing: Consider software that can streamline billing and financial operations for B2B SaaS. Software like Maxio can automate your billing, subscription management, collections, and reporting.
Build those damn waterfall charts: Communicate the impact of these changes to stakeholders, including investors and board members. Use visual aids like waterfall charts to illustrate the transition’s effect on revenue recognition and cash flow. Software like Planful can help you accurately forecast for short, medium, and long term.
Introduce Payment Options: Offer multiple payment options (monthly, quarterly, annually) to cater to different customer preferences while incentivizing longer-term commitments with discounts.
Consider external financing options: This will help bridge cash flow gaps during the transition. This could include short-term loans, lines of credit, or revenue-based financing that aligns with the SaaS revenue model.
Segment customers for pricing and packaging: This should be done based on their usage patterns, value, and growth potential. Remember - you don’t have to charge everyone the same thing anymore! Partners like Blue Rocket can help you optimize your pricing strategy that link to value metrics at the customer level.
Sales comp: Design incentive structures that balance new customer acquisition with customer retention and expansion. This could include a mix of upfront commissions for new sales, retention bonuses for renewals, and additional incentives for upselling and cross-selling.
Run the Numbers
Listen on: Apple | Spotify | YouTube
I jammed out with Jim Caci, CFO of publicly traded SaaS company AvePoint. On this episode we cover:
The harrowing journey transitioning from selling perpetual licenses to SaaS
The metrics you need to add and subtract when you make the change to SaaS
How you pay your sales reps in each set up
How the metric Remaining Performance Obligation works, what it can tell you past deferred revenue
And how to avoid buyer’s remorse when buying AI today
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