Monday, October 8, 2007

Why Subscription pricing is better for you and your customers

In my last blog post, I talked about the hockey stick and I mentioned that changing the licensing model for software can help eliminate the hockey sticks in sales.

I want to talk a little more about the subscription model because I think it is the way all software should be purchased.

In a perpetual model, the customer pays a huge up front "license" fee and then a yearly maintenance fee, typically 20-25% of the license fee.   In a subscription model, the yearly charge is the same.  There is no up-front "balloon" payment.

Let's look at this first from the ISV standpoint and then from the customer side. 

What this means for an ISV:

  1. PLUS:  In a typical subscription model, there is a recurring revenue stream generated that can be depended on year after year and therefore the business can be planned better.  There are less peaks and valleys because of a missed deal.
  2. MINUS:  The growth rate is slower because ISVs do not get the initial spike of revenue from the license.
  3. PLUS:  You may sell more because the yearly subscription is much lower than the up-front license, so therefore most companies can justify the expense. 

What this means for a Customer:

  1. PLUS:  No capital expenditure.  This means the decision to buy is not left in the hands of the accountants and thus the software can be purchased faster.
  2. PLUS:  Dependable budgeting because the price does not change from year to year.  Need to add more licenses?  Simply pay a little more.  No need to delay because of high licensing costs.
  3. MINUS:  Depreciation is not really an option at this point.  So, if your accountants were counting on writing down that "major" software investment, no such luck.

It is taking companies time to come around to this model because it is not something they are used to.  The reality is that it creates a partnership between the ISV and their customer.  The ISV wants the customer to do well so they will continue to use the software and possibly need more.  The customer has not been raked over the coals and therefore feels better about the relationship with the ISV.

By the way, this is also very similar to the Software-as-a-Service model with only one exception.  In SaaS, the application is hosted. 

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