Which pricing structure is right for your business?
Subscription services are quickly overtaking the traditional licensing model. Gartner predicted an 18 percent growth rate in 2017, with the software as a service (SaaS) market set to exceed $75 billion in 2020.
Gartner further anticipates that in 2020, 80 percent of software companies will offer a subscription instead of or alongside a traditional license pricing model.
Consumers are also switching away from an ownership model to subscription and on-demand services. In 2017, subscription businesses grew eight times faster than the S&P 500 and five times faster than U.S. retail sales according to the Zuora Subscription Economy Index (SEI).
The popularity of subscription services
Ten years ago, the idea that we would forgo purchasing something in favor of a subscription was an early-stage concept, yet to achieve mass consumer adoption.
Subscription services, such as Netflix and Spotify, were mainly popular with younger audiences, attracting a student and young professional, urban demographic with a keen interest in trying out new apps and technology. Your classic early adopters.
Now the U.S. Census Bureau's American Community Survey shows that subscription services are attracting older, more mature demographics with a much wider geographic spread, far beyond major metropolitan areas. Subscription services have gone mainstream. The Harvard Business Review confirms that "30% are between 35 and 54, and 22% are age 55 or older, which is good news for consumer-focused app developers and startups.
Amazon is another sign of the health of the subscription economy. Ten years ago, Amazon was mainly known for being a great website to buy cheap books, DVDs, and CDs from. Now, according to a recent Consumer Intelligence Research Partners report, 46 percent of U.S. households have an Amazon Prime account. This means that around 20 percent of the U.S. adult population has access to a Prime account. Not only does this guarantee a two-day delivery, but subscribers can get a wide selection of TV shows, movies, and music on demand, on any device.
Even cars are moving towards a subscription model. Uber and rival companies, in some cities, have overtaken traditional taxi use. Cadillac and Porsche both launched subscription car offerings in New York and Atlanta, Georgia, in 2017, with prices starting at $1,500 per month. Subscribers have the ability to control everything through apps and can swap cars multiple times every month.
With these trends establishing subscriptions as the way forward for consumers, it should be no surprise that businesses are switching to cloud-based subscription software options over traditional license options.
The benefits of the subscription model
For businesses and consumers, subscriptions instead of a one-off capital or license purchases offer several advantages. Costs and budgets are controlled. With a subscription, you know what you are paying every month. It is fixed. Payments come out once a month on the same date. Budgeting is easier.
Compared to traditional software licenses, most software subscriptions are cloud-based, thereby removing the expense and risks associated with self-hosting. Hardware costs, as well as maintenance and security concerns, are put in the hands of the vendor.
Security is increasingly important for businesses. More companies than ever are at risk of cyberattacks. Outdated legacy software managed on internal servers is at greater risk of falling victim to an attack that could see consumer data stolen, causing irreparable damage to brand reputation and incurring significant costs for the business. Knowing that applications are hosted on secure servers, in Amazon or other cloud-provider data centers, gives many business owners, boards, and investors peace of mind.
Security, however, isn't the only advantage of software subscriptions.
Ease of use and mobility are two important advantages. Traditional licenses are sold on the number of "seats," or users. So if your company has a staff of 10 people who need access to a certain piece of software, they're all given a license, which means they can only access that software on their individual desktop computers.
Traditional licenses are often sold alongside installation packages, upgrades, add-ons and maintenance. In the same way that millions of consumers now prefer the convenience of Netflix to cable, businesses don't want the hassle and extra expenses involved in buying traditional licenses.
Most businesses also need software their team can use on smartphones and tablets. Setup, upgrades and support should be included. Businesses prefer fixed costs and the ability to use any piece of software on any device, anywhere in the world, around the clock. Traditional licenses don't give people the same level of support and freedoms, which are important, if not essential, to how modern professionals and businesses operate.
In almost every sector and operational area today, subscription software replaces legacy license providers.
From accountancy to payroll, time management, HR software to CRMs, cloud storage to creative applications, there are legacy players transforming their offerings, such as Adobe, Microsoft and HP. Alongside those are more established newcomers that started as cloud providers, such as Dropbox, QuickBooks, and Salesforce, plus thousands of fast-growing startups.
Switch to a subscription model
Developers and software companies, in particular, have benefited from this tidal shift in consumer preferences.
My business, MacPaw, was in the same boat as other firms: Either we went the freemium, in-app purchase route or we sold apps that users paid a fee to download. Some apps could generate revenue through advertising, connecting an app to the Google Display Network, for example. However, that is only possible when your app reaches enough people; even then, adverts can put users off, causing some to delete the app altogether.
Until recently, most app developers couldn't benefit from subscriptions in the same way as SaaS companies. In 2017, we launched Setapp. In just over one year, we've exceeded $1.5 million ARR (annual recurring revenue) with tens of thousands of users in dozens of countries. Through this subscription, we offer our own apps and work with dozens of independent app developers, sharing 70 percent of the revenue with them, depending on the number of apps downloaded and how often they are used. We work hard to ensure the revenue fit is as fair as possible.
Developers and software companies are ideally placed to provide subscription offerings to businesses and consumers. But as we've seen, looking at the companies and sectors covered in this article, and knowing how many subscription services exist in the world, almost any business could look at generating revenue through subscriptions.
For software companies, staying relevant, keeping customers happy and improving cash flow necessitates a shift away from traditional licenses to a subscription offering. Traditional licenses are dying – a trend that is not going to reverse.
Consumers and businesses want and expect necessities and treats delivered consistently, when they need them, and for a convenient and affordable monthly price. That means every company, from a chocolate brand to payroll software firm, should, whenever possible, give customers the option to subscribe, making it better for them and you.