By: Cris Wendt
Companies that do well selling software licenses and digital goods understand the importance of separating the entitlement from the fulfillment of the digital goods. For companies used to selling physical devices, there is often a lack of the full appreciation for the separation of buying and delivering. In the world of selling a physical device, there is typically a single purchase event followed by a single delivery event, a very linear process is followed. This process is characterized as the purchase of a product, followed by the delivery, and then the revenue recognition event. In the world of software, or, in the world of software up-sells in the device world, this model doesn't work so well. It's part of thinking like a digital goods company, and not a hardware company.
To get a complete understanding, it's good to start with terminology.
- Entitlement simply reflects a commitment of future value made as the result of a purchase, somewhat akin to a debit card. The purchase of a software license entitlement allows the user to use, and in a sense re-use, the software within the bounds of a license agreement for the term of the agreement.
- Fulfillment is the act of redeeming value from the "entitlement debit card". To be more specific, fulfillment is the act of actually obtaining the software bits and associated elements, such as license activation keys, or documentation to which the user was entitled when they made the purchase.
In addition to a software entitlement, there can be a support entitlement, which typically provides the user with some form of software phone support and "software updates" over the course of the life of the support entitlement for each software entitlement (and/or for hardware/device).
There are some key reasons why it's important to be keenly aware of the separation of entitlements and fulfillments:
In the software world, when software download facilities are used, revenue can be recognized after an entitlement has been created, but before the actual fulfillment (or download) occurs. Simplify providing full access and notification of the process and location to perform the download is sufficient to recognize revenue.
- In the software world, a software entitlement or a support entitlement is usually created once (or infrequently), but it may be fulfilled many times (often due to administrative tasks). It's important NOT to require a new entitlement (nor a new event in your ERP system) each time a fulfillment is required. This is a common problem when high-tech manufacturers begin the journey of offering software. In the software business, there is constantly a need to fulfill software due to software moves, transfers, upgrades, updates, re-installs, or to address problems (an incorrect order).
What all of this means is that as you begin to create business processes and systems to deliver software (or the license key-enabled up-sell of new device functionality) be sure to design in such a way to separate, but coordinate your ERP/finance activity, entitlement management, and fulfillment management to deliver value.
When we described this approach to Andy Roth at Tekelec, he called it "Loosely coupled, but highly cohesive". Well stated.
Did you miss earlier steps? You can access them here…
Step 1 – Understanding the Opportunity that Becoming a Software Company Can Offer
Step 2 – Use Software Licensing Methodology to Enable Product Agility in the Marketplace
Step 3 – Balancing Revenue Recovery & Customer Satisfaction with Your Software Compliance Strategy
Step 4 – A Paradigm for the Delivery of Digital Goods