Ten Steps to Optimizing Your Software Licensing Revenue

WHITEPAPER
Ten Steps to Optimizing Your
Software Revenue
A Practical, Proven Transformation Program for Intelligent Device Manufacturers

Ten Steps to Optimizing Your
Software Revenue
Executive Summary
Today’s global technology marketplace is challenging,
competitive, and dynamic. In response to these market
conditions, device manufacturers are re-thinking their
business models and product strategies.
If you’re a intelligent device manufacturer, an attractive
business transition strategy is to move into the software
business by becoming more software-centric in how value
is delivered and monetized. By delivering more value to
your customers in the form of software, your company can
increase margins, build competitive differentiation and
recurring revenue streams, more precisely target multiple
market segments, and dramatically increase customer
satisfaction. Cumulatively, these advantages can have a
substantial—and even transformational—impact on your
company’s bottom-line business performance.
So how can your company become more software-centric?
How can your company leverage software to drive revenues,
efficiency and flexibility? How can it most effectively reap
the rewards of software-based revenue streams, while
avoiding the risks associated with entering a new business?
Based on our experience helping many of today’s leading
device manufacturers successfully move from an exclusively
hardware-based model to one that optimizes software
revenues, Flexera Software has developed a practical,
proven approach for such a transformation:
1. Socialize and build consensus for the transformation
2. Understand software and develop a
monetization strategy
3. Determine appropriate compliance policies and
enforcement mechanisms
4. Understand the difference between delivering
hard goods and digital goods
5. Understand the software value lifecycle
6. Instrument business processes to support the
value lifecycle
7. Implement a customer self-service portal
8. Define and execute a software product management
and go-to-market strategy
9. Implement appropriate sales training and
compensation policies
10. Report, review, and respond
By following these ten steps, your company can build a
thriving software business, even if it has never licensed or
monetized software before. And, by doing so, it can more
adaptively compete in a global marketplace where customer
requirements and expectations are constantly changing—
and where rapid responsiveness to those changing
requirements and expectations is essential for long-term
business growth.
Why Software?
Before outlining how to you can optimize the performance
of your company’s software business, it’s a good idea to
review why it’s to your advantage to focus on software in
the first place. For starters, you probably already deliver
a lot of embedded software in your device to make it fully
functional. Here are some of the main reasons to shift your
strategic focus to software and to monetize that investment.
Greater Lifetime Customer Revenue
When you deliver value to your customer in the form of
software, you can create recurring revenue streams that
improve your company’s top- and bottom-line performance.
You can do this through subscription licensing,
maintenance/upgrade fees, usage metering, or any other
appropriate model. So instead of just being limited to one-
time hardware purchases, you can build multiple (and fairly
predictable) sources of ongoing revenue.
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Ten Steps to Optimizing Your Software Licensing Revenue
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Better Alignment of Product Feature/Cost with Target-Market
Customer Requirements
When you focus on delivering product functionality as a
set of software entitlements, you gain much more granular
and flexible control over how you package and sell that
functionality. So you can efficiently create lower-end
products at lower price-points, mid-market products at
moderate price-points, and premium products at higher
price-points—all with the same basic code and hardware.
All you change with each different product is which
software capabilities you license to the customer.
The Advantages of “Try-Before-You-Buy” Sales
By enhancing your control over software license rights or
software entitlements (the customer’s right to download, use,
and update software), you can also boost sales and shorten
your sales cycles with a “Try–Before–You–Buy” model.
Under this model, you can allow prospective customers to
try your products during a trial period—while ensuring that
they will not be able to continue using the product if they
don’t purchase the necessary software licenses.
Easier Cross-Sell and Up-Sell
A software-centric product model also eases cross-selling
and up-selling, since customers can immediately activate
newly-purchased product capabilities by simply entering a
license key. You can also offer these capabilities on a “Try-
Before-You-Buy” basis to overcome customer objections, just
as you would with an entirely new product installation.
Streamlined Distribution with Electronic Software
Distribution-Enabled Self-Service
It takes time and money to pre-configure your hardware
devices with the right software. With the right approach
to entitlement management, on the other hand, you can
quickly and easily drop-ship devices—and then allow
customers to retrieve the software they need via a self-
service portal for electronic software distribution (ESD).
This cuts your costs and improves customer satisfaction.
Accelerated Revenue Recognition
Under an exclusively hardware-centric business model, the
revenue on any given sale can be substantially delayed by
the process of building and shipping units for freight-on-
board (FOB) invoicing. With software, on the other hand,
you can often recognize revenue shortly after an order is
placed by simply providing customers with access to your
software and any associated license keys.
Embrace Virtual Appliances and Cloud Computing to Enter
New Markets
If your software can run on standard enterprise computing
platforms, you can enter new markets by licensing it to run
on your customers’ virtual machines and/or internal cloud
environments. This gives the customer the benefit of a lower
cost—since they eliminate hardware-related expenses—
while preserving your profit margin. Software-only solutions
can also be delivered under a software-as-a-service (SaaS)
and/or external cloud model, which represent a rapidly
growing worldwide market.
The above is not even an exhaustive list. By provisioning
your devices with software or offering stand–alone software
solutions, you can more quickly bring new capabilities to
market, leverage your technical advantages through a wider
range of OEM licensing relationships, and more flexibly
enhance your own product offerings with the intellectual
property of your partners and suppliers.
Together, these business advantages build a very powerful
case for becoming a more software-centric company and
in some cases making the eventual move to a software-only
company to deliver value to customers.
Ten Steps to Optimizing Your Intelligent Device Revenue
Using Software
While a shift in business strategy to a software-centric value
proposition offers numerous advantages, it is not easily
accomplished. To optimize the results you achieve from
such a shift—and to avoid the mistakes other companies
have made as they have similarly transitioned their
business strategies—it is important to follow a proven,
practical process.
Based on the experiences of other hardware manufacturers,
there are ten specific steps that you should plan on making
to ensure the success of your own company’s transition to
software sales. These ten steps are:
1. Socialize and Build Consensus for the Transformation
The transition to a more software-centric company can
be a challenge—and will require collaboration from
all areas of your company—so it is important to get
everyone on board before undertaking the initiative.
Everyone should be educated about the advantages
your company is pursuing, so they have a clear sense
of why the effort involved is worthwhile.
The people who will be required to participate in the
process should also have ample opportunity to voice
their concerns and objections. By clearing the air
and ensuring the entire transition team is on the same
page, you can make sure that personal reservations
don’t derail your effort once your initiative is
underway. This consensus-building can also better
ensure that department managers are, in fact,
committing the resources that you will need later on in
the process.

2. Identify the Differences Between Delivering Hard
Goods and Digital Goods
With hardware, your company ships a product to a
customer or a channel partner. Once that physical
product is delivered, you can invoice it. If for some
reason the customer or dealer is not satisfied, the
product has to be physically shipped back to you
before you can issue a refund.
Software delivery is typically quite different. Instead
of shipping physical goods to the customer, you may
instead simply 1) notify the customer that the software
is available for download or 2) provide them with
a license key to “unlock” access to functionality of
software that they have already installed (or, in the
case of SaaS, that they simply access via the Internet).
Two concepts in particular that you will need to
bear in mind are entitlements and fulfillments.
Understanding these concepts, and the impact to your
business, will probably have an effect on how you
design your supply chain systems.
• Entitlements are the commitments your company
makes to future value as the result of a financial
transaction, such as a purchase. This can make a
software purchase somewhat akin to a debit card.
The purchase of a software license may entitle
your customer to use your software within certain
restrictions, to receive patches and upgrades for
a certain period of time, and to receive a certain
amount of technical support.
• Fulfillments occur when your customer actually
obtains the software bits, license activation keys,
support event resolutions, or other items of value
to which they became entitled when they made
the payment stipulated in their license agreement.
These fulfillment events can obviously occur months
or years after their purchase of the corresponding
entitlement. In addition, information required by
the customer to perform the fulfillment, such as a
particular Machine ID onto which the software
may reside, may not be available at the time of
entitlement. Therefore, such information should
not be required at the time that the entitlement is
created, as it could introduce unnecessary delays in
revenue recognition.
An entitlement can provide the basis of multiple
fulfillment events over time (for example, a sequence
of free “point” upgrades). And again, in stark contrast
to the hardware business, revenue in the software
business can be realized at the time of entitlement—
rather than being deferred until fulfillment. This
distinction becomes important because systems that
support the ordering and entitlement creation will
typically be separate (but linked) from systems and
processes that support the fulfillment activities. Often
existing hardware supply chains are not designed to
separate entitlements and fulfillments, often resulting in
the need for some process and systems enhancements.
A clear understanding of this distinction will be
important for Step 5.
3. Develop a Software Monetization Strategy
With hardware, customers own a physical object
that they can pretty much do with as they like. With
software, on the other hand, customers don’t actually
own anything. Instead, they purchase the right to use
the software based on the terms and conditions of
their licensing agreement.
So, when marketing and selling software, it’s important
to understand how you can structure licenses to satisfy
your customers’ needs and achieve your business
objectives. Licensing parameters to consider include:
• License Term – Software licenses entitle customers
to use the software for a specific time period,
and they confer associated entitlements (such as
maintenance and support) for that period. You can
therefore decide which entitlements to offer for
which period—and/or whether some entitlements
should be perpetual.
• License Metrics – Software licenses also limit the
scope of the customer’s use. You can limit the use
of your software by device, by number of named
users, by number of concurrent users, by location
and/or by some capacity metric such as number
of channels or bandwidth/throughput.
• Licensed Features – You can also be selective
about the specific software features you package
into the licenses you offer at your various price-
points. This allows you to better align value
delivered to revenue realized—and to more
effectively target specific license packages to
specific types of customers.
Using these basic licensing parameters—along with
associated promotional programs and discount
structures—you can begin to address different market
niches in all kinds of creative ways. For example,
you can offer special service provider licenses that
allow your channel partners to cost-effectively support
multiple customers with a single fixed- or variable-cost
license. Or, you can grant customers the ability to scale
up their implementation temporarily to handle periods
of peak demand, such as end-of-quarter or end-of-year.
Of course, you probably won’t want to introduce too
much complexity into your licensing schemes either—
since this can be confusing to your salespeople
and burdensome to your finance department. But
an understanding of these fundamental parameters
and how they relate to your go-to-market strategy is
important as you begin your software initiative.

4. Determine Appropriate Compliance Policies and
Enforcement Mechanisms
In addition to understanding the parameters of
software licenses, you and your company also need
to understand how to put licensing to work in the real
world. There are two main components to the practice
of software licensing: compliance and enforcement.
Your goal here is to develop a compliance philosophy
and employ an associated enforcement mechanism
which balances revenue recovery with a positive
customer experience.
• Compliance refers to whether a customer is or
is not using your software in accordance with
the entitlements they paid for in their license
agreement. If you’re going to sell software, you
need to decide what your compliance policy
is going to be. This policy should be explicitly
described so that there is no miscommunication
between you and your customers. At one extreme,
you could decide to simply trust your customers
to monitor their own software usage and keep
it within the terms of their license. At the other
extreme, you could decide to exhibit “zero
tolerance” towards license violations and deny
usage for any non-compliant use of the product.
Most software companies take a more nuanced
approach—and may in fact have different policies
for different customers, depending on factors such
as size, product, and geography. But a clear
license compliance policy is essential if you’re
going to be in the software business.
• Enforcement refers to the mechanisms and
methods by which you support your compliance
policies. One aspect of enforcement is the use of
mechanisms such as software license keys and
password/login access to detect if and when a
customer is in non-compliance. The other aspect
is the response of your software to the detection
of non-compliance. Again, these responses can
range from simply notifying the customer that
usage has exceeded the terms of the license to
the automatic lock-out of non-compliant usage. It
is obviously not very wise to use the latter type
of enforcement with large, trusted clients who are
using your software for mission-critical tasks.
On the other hand, mere notification may be
insufficient in markets where non-compliance is
an endemic problem.
5. Ensure Proper Support for Software Value Lifecycle
With hardware, the exchange of value between you
and your customers is largely completed in a single
transaction where you ship them physical goods. Of
course, you also continue to provide value in the form
of service and support—but the bulk of the value in
each exchange comes from a single initial transaction.
With software, the exchange of value between you
and your customers is continuously extended over a
multi-event lifecycle. As noted above, this lifecycle
consists of multiple entitlements and fulfillments that
may all be related to one transaction (i.e., the purchase
of a particular type of software license).
The events in a software lifecycle may include:
• Conversion from a “try-before-you-buy” license to a
full production license
• Software upgrades, updates, and/or bug fixes
• Migrations from a competitor’s product to yours
(which is a common practice for marketing to
accommodate your customers when they
acquire a company that was already using a
competing product)
• Renewals of existing license and/or maintenance
agreements
• Up-sells to versions with richer functionality (e.g.,
from Personal Edition to Professional Edition)
• Transfers of an existing software license to different
machines, platforms, locations, or departments
• Returns software licenses due to administrative or
technical errors
So, in addition to understanding the concepts of
“entitlement” and “fulfillment,” you and your company
need to map out all of the various specific entitlements
and fulfillments that will characterize your company’s
software value lifecycle.
6. Instrument Business Processes to Support the
Value Lifecycle
Because the software value lifecycle is so different
from the conventional hardware value transaction,
your company will have to implement and/or modify
many of its business processes. Your ERP and CRM
systems are probably set up to manage a traditional
quote-to-invoice (Q2I) or quote-to-collect (Q2C)
process. But there are a variety of use cases that you
will have to add to manage the “prospect-to-support”
(P2S) process associated with your new, more complex
software value lifecycle.

All of these use cases must be properly tooled in your
ERP, CRM, and other systems in order to maintain an
accurate view of the customer, ensure effective product
delivery, and accurately execute financial operations
such as revenue recognition.
7. Implement a Customer Self-Service Portal
In addition to making the necessary changes to your
internal IT systems, you’ll probably want to support
your software business with a competitively featured
customer self-service portal. A self-service portal
can reduce your operational costs, enhance
customer satisfaction, accelerate recognition of
revenue, and increase customer acceptance of your
software products.
Self-service portals can include:
• Online payment/transaction processing
• Downloads of software and software license keys
• Signup for maintenance and support entitlements
• “My Account” views into current entitlements,
completed, and pending fulfillments, etc.
• Online tech support—including trouble-ticketing,
chat, and FAQs
• Social networking and user community facilities
Customer self-service portals typically function as an
extension of an entitlement management and fulfillment
systems, which insulates your core ERP and CRM
systems from their real-time processing workloads.
8. Define and Execute a Software Product Management
and Go-to-Market Strategy
With the preceding conceptual foundation and IT
capabilities in place, you can now begin to define
and execute your software product management and
go-to-market strategy.
Your software product management strategy will be
shaped by the answers to questions such as:
• How will we structure and brand our various
software product lines?
• What are our target markets—and how can we
best package and price different sets of software
functionality to address the requirements of
those targets?
• How are our competitors structuring their product
lines and packaging their functionality? Do we
need to “counter-program” against their strategy?
• What new incremental functionality should we be
working on?
• What old functionality should we be preparing
to discontinue?
• Where do we have to maintain backward
compatibility?
These P2S business process use cases can be divided into nine main categories:
Non-revenue pre-sales entitlements Includes pre-sales demonstrations and “try-before-you-buy” evaluations.
Revenue entitlements Includes new product sales, conversion of try-before-you-buy to production,
sales of add-on product sales, etc. Adapts to type of customer, channel, and
other relevant transaction parameters.
Administrative entitlements Includes processes that enable revenue entitlements—such as an upgrade
entitlement for a customer who has purchased a support agreement—as
well as processes for adding new customers and products to CRM and
ERP systems.
Entitlement administration Includes processes such as changing customer addresses or corporate parent
(in the event of MA activity).
License fulfillment Includes processes by which customers receive software, license keys, access
to SaaS/cloud services, etc.
License lifecycle Includes processes by which customers can manage their own software
license assets and perform many administrative tasks like moves, transfers,
and software asset management.
Customer support Includes processes that define how the customer’s support entitlements are
fulfilled under various entitlement and situations.
Business intelligence These use cases define the methods by which your company captures the
information it needs regarding its various P2S activities.
Transition planning Includes processes and methods for consolidating the P2S process of an
acquired company with your own.

• With which third parties should we be
engineering integration?
• How can we best engineer our solutions for
SaaS, managed service provider (MSP) and cloud
computing markets?
Your go-to-market strategy will be shaped by the
answers to questions such as:
• How will we announce and promote our new
software business and branding?
• What kind of discounting and/or entitlement
incentives will we use to promote sales?
• What distribution channels will we use for our
various products and target markets? What
discounting and aggregation programs will we
implement to incent our channel partners?
• How will we position our solutions and their
respective value propositions against those of
our competitors? Will we make special offers to
customers who want to replace our competitors’
software with ours?
• How will we tier and structure our technical
support entitlements?

Once you’ve made these decisions, you can start
plugging appropriate product names, SKUs, pricing
and other values into your ERP, CRM, entitlement
management, fulfillment management, and customer
self-service systems—and building out the marketing
materials and programs you need to support your
sales effort.
9. Implement Appropriate Sales Training and
Compensation Policies
At traditional intelligent device manufacturing
companies, salespeople are practically hard-wired to
focus on selling hardware and to treat software as a
secondary value-add. Such companies typically think
in terms of selling physical devices on a “cost plus”
basis—and understand their value proposition as
revolving primarily around device capacity, capability,
and total cost of ownership (TCO). In competitive
situations, software may even be discounted to near
zero in order to close the hardware sale.
The transition to a more value-centric approach to
software sales will require a variety of changes to your
sales model. These changes will likely include:
• Sales Training that aggressively addresses the
entrenched hardware sales culture. This may start
with sales managers first—and then subsequently
get rolled out to front-line salespeople and account
managers. Key points of this training will include
an understanding of the concepts of entitlements,
fulfillments, and the software value lifecycle.
Salespeople need to be educated about how
customers make software-buying decisions, how to
take advantage of “try-before-you-buy” licensing,
and other aspects of the software sales cycle that
are materially different from that of hardware. To
succeed, you must get sales management buy-in
and the management must exhibit leadership in
the selling of software and software value.
• Sales Compensation that appropriately
incentivizes sales people to build your company’s
current and future software revenue streams. It may
be particularly worthwhile to weigh compensation
in favor of software licenses and license
renewals—rather than on a single bookings
target—given the importance of your company’s
shift in strategy and the fact that renewals
represent a high-margin sale with a low cost of
sales.
10. Report, Review, Respond and Go Live
A transition from a hardware-centric business model
to a software-centric one is a complex undertaking.
So even with the best planning and execution, your
company probably won’t get everything absolutely
perfect right out of the gate. That’s why it’s important
to be able to capture the full range of business
performance data necessary to fine-tune your strategy
and tactics. By consistently reviewing that data,
you can make the adjustments necessary to
optimize software revenue and margins, retain
your customers over the long haul, and grow your
share of target markets.
Key performance indicators (KPIs) to review
may include:
KPI Potential remedy
Salespeople who are lagging in
license and license renewal sales
Provide additional sales
training
Customers or territories where
license metrics are lagging in
proportion to size
Address possible
compliance/enforcement
issues
Low demand for a particular
solution package—despite
high demand for closely related
packages
Re-structure, re-price or
discontinue package
Low conversion rate of try-before-
you-buy license
Fix technical problem or
flaw in user interface
Poor channel performance Re-structure channel
discount and/or provide
better marketing support
Rapid consumption of technical
support entitlements
Improve product, improve
documentation, or offer
bigger/more economical
support packages

These ten steps provide the basic roadmap for a
successful transition to optimized software revenue.
The specific way your company will navigate these
steps will depend on the type of software you’re
selling, who you’re selling it to, your current business
culture, and the resources at your disposal. But by
following this roadmap, you can substantially mitigate
the risks associated with such a transition—and
accelerate your overall time to benefit.
Resources for Your Business Transition
In addition to following the right process, it will also be
important for your company to have the right resources
in place to ensure a successful transition. Here are four
resources in particular to think about as you plan the launch
and optimization of your software business:
A Strong Mission “Champion”
As noted in Step 1, a successful move to optimized software
revenue is a highly collaborative effort that will require the
involvement of leaders across your company. However,
you will also need the right champion or champions for the
move. This may be you. Or, depending on your position
and political influence at your company, it may be essential
for a C-level executive or board member to drive your
company’s effort. Often, a combination of leaders are
necessary—some of whom ensure that everyone fulfills their
role in the move, and others who take primary responsibility
for the in-the-trenches work of transition management. But
without strong championing, a strategic effort like this can
get derailed by inertia and departmental resistance.
Key Management Hires from the Software Industry
While many of the managers at your company may be
able to successfully make the transition from an exclusively
hardware-centric business model to one that capitalizes
on the market opportunities for software, some may not.
And it may not be in your company’s best interests to rely
entirely upon those abilities, anyway. That’s why, as part
of their transition effort, many companies recruit veteran
managers from the software industry for key positions in
product management, marketing, and/or sales. The wealth
of experience and contacts these managers have can be
invaluable in steering your company down the right path.
The Right Technology
It takes software to sell software. So your company will have
to acquire best-in-class solutions for software monetization,
application installation, and other core processes in the
software-value lifecycle. Because these software solutions
will be so deeply ingrained in your software business, it is
probably smart to start evaluating alternative products as
early in your transition process as possible. You’ll certainly
need your evaluation and acquisition of these solutions to
be completed well before Step 6, so that your overall effort
isn’t delayed by your technology implementation cycle.
The Right Partner
In addition to hiring veteran managers into key positions,
your company can tap into the collective expertise and
experience of the software industry through the right vendor
and consulting partnerships. The right partner can support
your transformation project with proven best practices
developed over the course of many similar transitions—and
help you avoid the mistakes that other companies in your
position have made in the past. The result can be an
easier and less costly transition that yields greater results
in less time.
The transition to software can be a challenging one. But
it can also be extremely rewarding in terms of long-term
business performance. The above resources can play a
central role in achieving that performance. It’s interesting
to note that three out of four of them involve people.
Ultimately, it is the commitment, creativity, and hard work
of people that enable companies like yours to succeed in
the software business. But that’s true of any business. The
difference with the software business is that it can generate
the healthy margins, recurring revenue, and global market
reach that make the required effort more than worthwhile.
About Flexera Software
Flexera Software helps application producers and
enterprises increase application usage and the value they
derive from their software. Our next-generation software
licensing, compliance and installation solutions are essential
to ensure continuous licensing compliance, optimized
software investments and to future-proof businesses against
the risks and costs of constantly changing technology. Over
80,000 customers turn to Flexera Software as a trusted and
neutral source for the knowledge and expertise we have
gained as the marketplace leader for over 25 years and for
the automation and intelligence designed into our products.
For more information, please go to:
www.flexerasoftware.com

Flexera Software LLC
(Global Headquarters):
+1 800-809-5659
United Kingdom (Europe,
Middle East Headquarters):
+44 870-871-1111
+44 870-873-6300
Australia (Asia,
Pacific Headquarters):
+61 3-9895-2000
For more office locations visit:
www.flexerasoftware.com
Copyright © 2015 Flexera Software LLC. All other brand and product names mentioned herein may be the trademarks and registered trademarks of their respective owners.
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Ten Steps to Optimizing Your Software Licensing Revenue

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Ten Steps to Optimizing Your Software Licensing Revenue