Tableau subscription pricing – a proxy for software acquisition

SUMMARY:

Tableau’s switch to subscription model provides an rare insight into what this could mean for buyers. This story exposes some of the immediate issues.

Tableau’s latest earnings call was interesting in one specific sense as it relates to buyers. The company was wholly transparent about how it is pricing, having fully switched to a subscription model. Talking about Tableau subscription pricing, Thomas Walker, CFO said:

Let’s take the individual user cost of a customer deploying Tableau Server as their analytics solution. Our new subscription price is now $35 per user per month billed annually. The upfront cost is $420 compared to $1,000 on a perpetual basis. On a perpetual basis, we would recognize the entire amount in year one as both license and maintenance revenues, specifically $800 in license revenue immediately and $200 in maintenance revenue recognized over the course of the year. Assuming the customer renews with us, we recognize $200 in each of the years two and three under the maintenance revenue line.

Now, under subscription pricing, we bill the customer for $420 in year one. And assuming the customer continues to renew, we go on and bill $420 per year in years two and three and recognize it as license revenue.

Carrying that math out, you’ll see the overall effect on revenues and bookings. In year one, we’ve booked and recognized less than half the revenue as compared to the perpetual scenario. That’s $420 versus $1,000. However, in years two and three under the subscription pricing, we booked and recognized more than twice the revenue in each of those compared to the perpetual basis, $420 versus $200. The economics on our Tableau Desktop products are similar.

Rebasing your costs

One of the core arguments for switching from perpetual licensing to subscription has always been the opportunity to turn a CapEx item into OpEx. That was always a bit of smoke and mirrors for high value items. Unless you’ve got very deep pockets and an urgent need to drain the cash tank then it is always possible to finance an enterprise software purchase on what amounts to leased terms, thus matching cash flows with the tax benefits from a capital acquisition. Be that as it may, the OpEx argument has proven attractive because it is a lesser cash flow item that gets expensed along the way. But is it all that it’s cracked up to be?

The chart above models Tableau’s pricing over a period of 7 years for Tableau Server when moving to a subscription model for a single user. As you can see, the cumulative costs intersect somewhere in year 3-4, after which the cumulative subscription cost exceeds that of the perpetual license model. Ergo and in the long run, it costs more to take up Tableau’s subscription model.

‘Aaaah’ but I hear the peanut crowd saying, what about all those ancillary costs you get with subscription? Au contraire I reply – this is a pure price switch and nothing to do with conflating subscription pricing with cloud models – which themselves have been known to exclude maintenance when you read the fine print. And why 7 years? That’s the lower end of lifecycle for enterprise acquired applications.

Of course it is not as simple as this. Tableau anticipate (as do many cloud/subscription based providers) that you will sign for an initial 3 year period. The argument goes – get cost lock in. I say that in a world where inflation is almost zero (and likely to remain so for the foreseeable future) then that argument is nonsense.

Even so, the fact remains that buyers like the idea of a cost lock in for long periods of time and the model above shows exactly that.

More wrinkles

There is another wrinkle to this which is not apparent in the chart. Assuming a 7 year term, it is more likely that cost will go down in the subscription model upon negotiation for periods after 3 years rather than up for what amounts to the same functionality. That changes if new modules are added that genuinely add novel functions but let’s just keep it simple. You could lock in a negotiated price early on and achieve a saving, especially where there is volume and/or where you are highly confident of expanding the technology estate.

The problem for buyers comes in determining how many licenses to buy. Tableau, like many other vendors, operates a ‘land and expand’ strategy where it gets into a department with a handful of licenses and then seeks to grow that out into the enterprise. It’s a legitimate model but one that Tableau struggled to scale in large enterprise, where the influence of IT is much more important and where Tableau has sometimes come unstuck.

Note how things are changing with the new model, simply by changing perceptions. In the latest earning call, Adam Selipsky, CEO said of the subscription model:

Now, subscription pricing for analytics is just better for customers. It reduces their risk, as they can make their buying decisions more frequently while avoiding large sum costs. We expect this freedom will help grow demand for Tableau from both existing and new customers. We anticipate subscription licensing will grow the overall analytics market. And if we do our job and execute effectively, it’ll grow our share of the market as well.

The great news is that we’re seeing this demand happen today. For example, in Q1, Brown-Forman, the maker of Jack Daniel’s whiskey and other spirits and wine, became one of Tableau’s newest subscription-based enterprise deployments. Their CIL identifies the flexible pricing structure as a major factor in their decision to deploy Tableau as their analytics platform of choice. By spending less upfront, Brown-Forman was able to scale at a global level and deploy the platform to about 1,000 people initially. They plan to continue expanding Tableau quickly to all of their employees globally.

A 1,000 seat deal is not shabby and, by the way, you can bet Brown-Forman was not paying full book price at that level for any of the years for which it contracted.

Working the splat and spill model

Tableau is hopeful that this what I call its ‘splat and spill’ strategy will accelerate revenue. Selipsky surely thinks so but is shoring up the argument with heavy hitters in the enterprise sales teams. From a buyer’s perspective, I can see advantages in being persuaded onto this model.

If I can get more users deployed quickly onto a technology then my training and onramp costs are dramatically improved. In a Tableau scenario, my early training costs will be higher than in a phased approach but that’s OK as I should benefit from economies of scale. Given those factors, I am likely to be more easily sold on a larger, initial deal and especially if I can get a more predictable view of my costs to deployment. What’s more, if I plan carefully then I avoid shelf ware – remember that subscription models are often a twist on classical i.e. bums on seats x price = kerrching.

What about those additional costs from taking on a subscription model? Here we are really looking at a balancing act between function, support and lifecycle cost. On that front, I’d want to work with the vendor to establish clear lines of sight into roadmaps alongside getting a sense of the support capacity I need for deployments now and into the future.

I’ve got to see value in outcomes. This is much easier with a technology like Tableau where the dream of ‘information democratization’ is finally becoming a reality. In this specific case, I note that Tableau is talking about mixing many data sources. That in itself is well worth exploring.

The Dave Kellogg view

Before closing, it is worth noting what Dave Kellogg, CEO at Host Analytics recently said about cloud BI on his well received blog:

Just as RDBMS themselves failed to deliver information democracy with SQL (which, believe it or not, was part of the original pitch — end users could write SQL to answer their own queries!), BI tools — while they helped enable analysts — largely failed to help Joe User.  They weren’t easy enough to use.  They lacked information discovery.  They lacked, importantly, easy-yet-powerful visualization.

That’s why Tableau, and to a lesser extent Qlik, prospered while the cloud BI vendors struggled.  (It’s also why I find it profoundly ironic that Tableau is now in a massive rush to “go cloud” today.)  It’s also one reason why the world now needs companies like Alation — the information democracy brought by Tableau has turned into information anarchy and companies like Alation help rein that back in (see disclaimers).

So, I think that cloud BI proved to be such a slog because the cloud BI vendors solved the wrong problem. They fixed a business model that wasn’t fundamentally broken, all while missing the ease of use, data discovery, and visualization power that both required the horsepower of on-premises software and solved the real problems the users faced.

My take

Tableau has already proven its place in the BI pantheon but will likely admit that its business model was faltering until it brought in new blood. That appears to be getting back on track albeit with a sharp turn in favor of subscription models.

While the evidence is still coming in, it appears Tableau has got this right because buyers are rewarding with their checks. That doesn’t mean buyers have necessarily got it right because as we know, the high point in any vendor relationship is the nano second before you sign the deal. Tableau will have to come back with working examples to prove the model provides the win that customers need.

Image credit - Chart by the author, featured story shot via Tableau