Everyone is in the application software business, making it the fastest-growing segment of the IT industry.
This creates sustained, intense pressure to grow and innovate. Competing in this market requires a relentless focus on extending and adding value to the installed base.
As digital business proliferates, application providers will need to do more than improve on their existing installed base. Instead, they’ll need to support and enable their customers' digital transformation.
Investment strategies
Application providers are always looking for white space - the next unmet or undiscovered need they can fill to increase installed base sales. It's not surprising that digital business is viewed as an opportunity to create entirely new markets.
While many providers have these powerful ambitions, their investment strategies may be insufficient to achieve the desired disruption.
Growth and investment priorities in applications are defined by the need to create new revenue from:
- First-time implementations;
- New or expanded functionality;
- Expanded units, users and use cases for existing implementations; and
- Replacements
Software leaders who can quickly find a way to invest more or differently on their digital endeavours and learn how to innovate and fail faster will have an advantage over less nimble competitors.
Effective partner and developer ecosystems are also essential to expanding the installed base, as well as to develop new functionality and use cases. Start building out these ecosystems as rapidly as you can afford it.
It’s important to note, however, that digital business ecosystems are much more diverse and interconnected than traditional, transactional developer and integrator partner networks.
Spending on innovation
While application software businesses emphasise customer engagement in innovation plans, product and service innovation remains the long-term priority. This doesn’t imply that they are unconcerned with customer engagement.
Rather, they may see better return on their innovation spend from meeting demand for new functionality.
As long as the economics of the application software business demand a steady stream of new or enhanced functionality to maximise installed base revenue, providers will spend on innovation.
It’s important to distinguish between the types of innovation, separating real, leading-edge product and business model innovation from what’s really renovation of existing products.
Changing business models
Many software application businesses have changed their business model as a result of digital transformation.
New software pricing models and increased use of free trials are often the two biggest changes made. Free trials are already "table stakes" for new functionality.
Gartner predicts that virtually all new analytic software purchases by 2017, for example, will begin as a free or low-cost proof of concept, enabling buyers to try before they buy.
That said, the track record for converting free trials to paid subscriptions is generally thought to be in the low single digits.
Top tips for 2017
If you’re seeking to enter or expand share in application markets, it’s important to:
- Plan for sustained, significant investment in product innovation, sales and marketing
- Look constantly for white space - new features and functionality, use cases and delivery models - that allow you to extend and add value to your installed base
- Build for the business buyer. The business buyer evolution has already occurred for applications. Designing for and marketing/selling to business buyers is no longer a novelty - it's table stakes
- Shift focus from cloud to what cloud enables. The cloud evolution has already occurred for applications. If you don't have a cloud-based offering, make that your innovation priority. If you do, then start thinking ahead to what you can enable for customers through this model
- Start building out developer and partner ecosystems as rapidly as you can afford it. Ecosystem development is crucial to creating new markets, building out customer relationships and ultimately driving new revenue
By Christine Adams - managing vice president, Gartner
This article originally appeared in the November issue of ARN magazine - to subscribe, please click here
