Subscription Pricing Is for Stagnating Products
jakobegger.at
jakobegger.at
Pricing and monetization models are often strategic decisions that can have a number of different short and long-term implications for a company and for its product development.
@maxpupmax has a great point about aligning incentives with referral structures.
@compumike has another good point about b2b customers many times preferring a recurring subscription in return for certain enterprise type features like Support and SLAs.
on the P&L side, @lukebennett makes a great point about ongoing cost with cloud services. This is generalizable to any sort of ongoing cost incurred to provide the service (e.g. support, guarantees on service, security, or even processing costs in ecommerce).
Additionally, subscription contracts provide some means making cashflow predictable as some flexibility in creating more immediate cash flow via prepayments or in letting companies borrow against existing contracts. Tomasz Tunguz (http://tomtunguz.com/) has a bunch of fantastic posts on this.
Finally, on the product side, I'd actually argue that in many cases a subscription model actually better aligns incentives between customer and company. In one-time purchase models, new customers are king. In subscription models, churn is a huge concern and customer success eventually becomes paramount and I think there are more than a few cases where that creates a better product. Tomas explains this better and in more detail than me: http://tomtunguz.com/renewals_percent_rev/
Not saying that subscription models are categorically better, just saying that it's a decision that might make a lot of strategic sense and shouldn't be disregarded out of hand.
People often move from one project or job to the next. If they rent their software, they'll unsubscribe when they no longer need it, and cease being your customer. But with a perpetual license, your customers will never cease being your customer.
This makes it much more likely they'll pick up my app again, when they need it again. For SaaS, I presume that the number of people resubscribing after unsubscribing is very low.
Now why is that important? Because a big user base is necessary for growth.
Word of mouth and personal recommendations are extremly important for a small developer like me. The biggest problem I have isn't convincing people to buy a license; my biggest problem is that my prospective customers have never heard of me.
For example I pay for the intellij monthly subscription, if I changed job it would be to a similar role and I'd keep paying for intellij (or my employer would).
Since JetBrains switched there hasn't been any stagnation that I've seen in their development speed or addition of new features.
JetBrains is competing against free in many areas of it's product range so they have an incentive to ensure that users are happier paying than not paying.
I think that subscription pricing is a perfectly fair deal for software you use everyday. But lots of software has a long tail of casual users. I really want to make my apps affordable for those less invested users as well.
It's fairly hard to be a WinZip power user after all.
That said, one counterpoint to this is that too much software depends on the cloud unnecessarily - in many cases there's no need to use the cloud, what the user wants to do should be perfectly possible locally and therefore the lack of any ongoing expense would remove the need/justification for subscription pricing.
Edit: Here's a perfectly timed example of this: https://news.ycombinator.com/item?id=11439001
The justification of the cost is the value that the app is bringing to me (or my business). If I had some kind of lead gen software that brought me an additional N leads per month I'd loooove to pay N(.05)(margin_on_closed_deal) or something like that -- and having used similar justifications to potential customers I know that many businesspeople agree.
This IMO is another disease. I don't really want to store my data in the cloud of a small independent company, who probably don't have many security chops, are not audited, etc. Moreover, if a company goes under, I can only hope that I can still access my data.
Give me a choice to store my data in Dropbox, iCloud, or whatever, but not in your private cloud.
B2B customers overwhelmingly would prefer to pay subscriptions instead of fixed up-front fees. It scales up and down with use, carries less risk when trying something new, is easier to evaluate "is this worth it?", and preserves cash.
B2C customers overwhelmingly would prefer not to pay for anything at all. :)
Not necessarily. For example, none of my businesses use any software on a rental model where it is critical to our business and having it changed or switched off in the future could cause serious damage. Recent versions of several expensive professional applications we use have gone subscription-only, and our response is simply that we'll keep using the older versions and do without the latest features. If that ceases to be viable because we can't buy any new copies we need any more, we'll take our entire business elsewhere.
I have yet to encounter any software at any price in the business world where there really is no sensible alternative to paying an arbitrarily high price forever and for risking your business taking a big hit if the software gets turned off. And while sometimes compatibility and data formats can form a significant barrier, I have also yet to find any issue that truly could not be overcome or any customer, client or supplier we couldn't work with because they were using the latest and greatest version of something and we weren't (or vice versa).
That makes sense.
I do wonder why nobody offers a subscription service but with some kind of a lease like option, when after paying X months(or when stability is at risk, or too big of a change happens) - you can with a button click port it to a 3rd party hosting and pay only hosting fees ?
That seems to better align with the customers , right?
They've some nice diagrams illustrating how it kicks in here: https://sales.jetbrains.com/hc/en-gb/articles/207240845-What...
Try reducing your Microsoft O365 subscription. Unless you are paying retail, they'll link your "subscription" to your EA and threaten you with a SAM if you try to unlink them.
Other providers are just using the subscription as a way to jack up your "maintenance" they shift that 20% cash flow to 35-40%, and you retain no perpetual rights.
Microsoft is in a rare position: they essentially have a monopoly - which seems more relevant to your pricing concerns.
Really? If you own a niche, before you had to convince customers to upgrade by adding good new features. Now the money flows in automatically. And since you own the niche, where else can the customers go?
Still, as a personal preference, I feel like subscriptions are less preferable. I want to buy something and own it, and the continued costs of subscriptions feels like a money suck. Beyond that, it seems to me that subscription costs almost always end up costing me, the end-user, more money.
Edit: thinking a bit more about it, I do suppose that I'm okay with paying for some subscriptions (e.g. VPN provider, Netflix, etc.) but it's the software program subscription model which I find most irksome.
Plus several that are fairly stagnate markets like Symantec, Intuit, etc. Granted, if they do nothing people go away eventually. But, subscription means being a slow adopter is enough you don't need to innovate.
In return you have a consistent predictable revenue stream.
That's not to mention that they have to deal with maintaining old versions of their products, and support costs that could easily exceed the LTV of a particular customer.
As a customer, I am often hesitant to shell out the big bucks for subscription software, especially because both Microsoft and Adobe have set up a pretty clear ceiling on what I consider to be worthwhile by charging $10/month for really really compelling product offerings (O365 Home for Microsoft, Photoshop & Lightroom for Adobe). So a "small"/less compelling app has to charge a good bit less for me to be willing to pay.
But in the long run, I'd rather pay, say, $20/year for a useful piece of software in perpetuity than $100 once every five years--because that way I always have the latest version and don't have to think about whether I really want to upgrade or not. And that aligns my incentives with those of the developer and reduces their support costs.
Over time, I imagine small software developers will figure out what a reasonable price is for subscriptions, and more software of any complexity will converge on this model. I, for one, don't especially mind.
If windows (for example) were on a monthly subscription model instead of a bi-yearly upgrade model, I think a lot of the consumer-facing failures at msft post-win2k wouldn't have happened. They couldn't bundle new features with breaking changes in a gradual-improvement subscription model.
Someone in my household got prompted to upgrade an iOS app they enjoy this evening. Apparently in this case, that person's incentives were aligned with the developer's, except for the new version including ads that weren't there before, charging via IAP for content that was free before, and not actually running anyway because it now has iOS 9 as a minimum requirement.
Sometimes having the latest version is a double-edged sword. If the developer has no incentive not to exploit customers who are already locked into their subscription model anyway, make that most times, in my experience.
Microsoft and Google can add little features that do just enough to wipe out niche products and make their suites stickier. Example: Google Docs voice dictation
Also, people will be comparing subscription prices to Microsoft et al. If I am paying ~$7 per month for an Office 365 subscription[1] that comes with Office, 1TB OneDrive space, Skype minutes, etc., $4 for some small utility would be overpriced.
[1] I actually pay far less, since I can use the academic version.
How many Dropbox customers went to that model for free, even though OneDrive is a garbage product in comparison?
Both are still trying to convince owners of old lifetime-licensed versions to sign up for subscriptions.
Will these low prices last when the strategy changes from "sign up more people" to "profit from the users we have"?
But what if your target market is 100,000 people? You can reach market saturation quickly and if you're only monetizing on the first purchase, you're SOL.
This post seems to have been written two years ago. I would like to see an update from the author on how his "free updates to people who only paid once" strategy is working out in 30 years.
(Of course, if you don't care about building a sustainable business, and just want to make some money now and possibly abandon everything in a few years, then this doesn't matter. I personally am interested in building sustainable businesses, though.)
For a stagnant product I don't know what the right model is.
For one that must keep iterating and maintaining and improving (based on direct customer demand) subscription works.
When revenue (and profit) comes from only one source (subscribers) the model is solid
I think this dogma of growth is dangerous as it can only go so far. Our whole economy relies on the notion of growth but I never quite understood why everything would either have to grow or die. In nature things grow to some extend and then try to form a self sustaining ecosystem that would basically go forever. Ironically the things that grow most aggressively in nature are the things we consider toxic. Things like viruses, cancers and weeds.
That said, I don't agree with his premise in regards to Microsoft, Apple, etc. I like having small continuous upgrades and in the case of Microsoft I am happy to pay $99/year so my wife and I get an Office 365 family plan.
I don't like new features added to just drive sales.
And that's the whole argument for why anyone doing subscriptions is obviously doomed to fail. Weird.
I am currently planning on selling a desktop product and I would be fascinated to know how many you sell.
Feel free to email me with any questions, I love talking about the business of desktop apps.
I'm hoping for a future where I can pay per hour like I do with an AWS server.
Want to use Adobe, download for free and pay 10USD per hour of usage. License as a Service.
That works as long as there is plenty of market opportunity left for your app, which might be the case for a little business in a big market. It's not the case if you actually do have close to a 100% installed base in your target market, though, and that is what some of these huge software companies are facing.
What I don't buy is the idea that going subscription-only is the only plausible alternative. I agree with the author here that trying to force subscription-only pricing is often a warning sign of stagnation, precisely because I disagree with this:
Paid upgrades won’t help.
Why not? If you're providing useful new features, or relevant compatibility changes as other parts of the technology world evolve, or effective security fixes in the face of new threats, you have added value and you can offer that through paid upgrades.
I would happily pay a sensible rate to Microsoft to continue providing security and compatibility fixes for my various Windows 7 PCs for as long as I need them. I think it's reasonable to expect a certain amount of support to be included for free with something like an OS -- after all, those security vulnerabilities are by definition defects in the original software -- but it's not reasonable to expect indefinite free support, and I'd be open to a transparent and reasonably priced alternative model. However, I won't pay them for Windows 10 under any circumstances, because the forced updates and questionable privacy/security details are deal-breakers no matter what else it has going for it.
Even without the security and compatibility issues, there are plenty of functions Adobe could have added or improved in various Creative Suite applications that would have justified a paid upgrade for everyone who uses it in a small business I work with, and we would gladly have paid the kind of upgrade prices they used to offer for those improvements. Sadly, they never did make most of them despite numerous users apparently sharing our interest in them, so they never got our money for any upgrades. Given that so far we've noticed only a few modest improvements we would actually have cared about in all the time since they went to Creative Cloud, we're perfectly happy with our older CS releases and not being locked into paying them money for whatever they think is a worthy improvement instead of whatever we think is a worthy improvement. We're currently far more interested in some of the newer competitors springing up in various niches, some of which are or might become better tools for us anyway.
So I agree with the author that trying to force a subscription model with no apparent benefits to the user is usually a sign of commercial desperation, and I expect that at some point (probably relatively soon, by business standards) the market will push back and the companies trying to do this will suffer for it, though no doubt they'll make a substantial amount of extra money exploiting their pseudo-monopoly status for a while first. However, I don't agree that selling fresh copies to new customers and giving free upgrades is necessarily the only viable alternative.
(cough) Ponzi Scheme (cough)