Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

by Tien Tzuo

THE FISH MODEL To understand why traditional software companies were facing such a steep uphill climb, you have to understand the Fish Model. In their excellent book Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business, Thomas Lah and J. B. Wood refer to this transition period as “swallowing the fish,” as the revenue curve temporarily dips below the operating expense curve before climbing back upward again: The fish is what happens when a traditional company starts to shift its revenue mix from an asset purchase model to a subscription model. In this scenario, the company experiences a string of quarters where top-line revenues shrink as revenues from large, pay-up-front deals are replaced by recurring subscriptions without the big up-front payment. At the same time as revenues dip, the company must make investments in many of the new capabilities and structures that are required for profitable XaaS. The traditionally profitable and stable mix of more revenue than costs on the left side of the chart is replaced with a tumultuous period of costs exceeding revenue. So, a fish: As Lah and Wood note, management teams chasing after quarterly numbers generally don’t like the look of that fish. They would just as soon avoid it altogether. There are boards and investors to consider, not to mention the fact that as traditional unit-based companies, Wall Street measures them on strict GAAP-realized profits, not growth rates based on deferred revenue. When...