Subscription Based Pricing
Subscription based pricing is growing fast.
The Adobe Creative Cloud has (mid 2017) over 8 million subscribers at this moment. To put that number in perspective: prior to the launch of the Creative Cloud, the installed base was 12,8 million active customers. So a large part of the active users have shifted to the subscription based Creative Cloud. CADCAM is moving to (on premise) subcription based pricing fastly too ; Autodesk stopped selling perpetual licenses of most individual products after January 31, 2016, with new licenses for these products available as subscriptions.
Software vendors like Saas licensing for 5 key reasons :
1. License management.
With traditional software purchases it was easy for customers to install multiple copies, perhaps accidentally, of software, which can cause a loss of revenue for vendors if the software was used but not licensed. License management was traditionally complicated and expensive for all parties involved. Moving to subscription models makes it very easy to clearly communicate licensing requirements and to enforce policies.
2. Version management and support
In traditional software and support models, customers might use old versions of software for many years resulting in many different versions, which would require support of multiple versions from vendors. Often, this would mean that support teams need extensive training for a long tail of legacy customers with different software versions. This was extremely expensive as support is a key cost in software development.
3. Focus on money-making customers
The third reason is that customers who previously depended on buying a single version of a product and continuing to use it for a very long time, likely many years past the end of support, are effectively eliminated.
4. Shorter sales cycles
Subscription licensing moves capital expenses (capex) to operational expenses (opex) which is generally seen as favorable, making subscription cost predictability. A finance department can accurately predict their costs over time, whereas, in the old approach, suddenly a large upgrade invoice would be forthcoming with potentially very little warning (often followed by large re-training expenses due to the possibly large gap in software versions.)
5. Recurring revenue streams
There are expected to be increased recurring revenue, which gives the vendor a less cyclical revenue stream.
Subscription based pricing is the new normal, but not as easy as it looks...
Most companies that start with subscription based pricing quickly find out that subscriptions come with special pricing AND monetization challenges. It's good to be prepared and think twice before you launch the plans. With an annual/monthly license approach, you make acquisition easier, but you also take more risk because you bet on your ability of keeping customers. It’s of course easier for them to step out, and this creates a financial risk (and it’s more difficult to forecast of revenue streams). If your churn is high, you are in (cash) problems soon enough…
Package building - and especially customer retention - is the key to profitability in subscription based offering - ensure you offer great value FIRST !
When it comes to pricing, this is the VC pricing process we recommend. The process is rooted in understanding your customers, your value chain and how value is created in your eco-sytem and for your customers - and how your pricing plans can capture part of that value for you.
This the approach we recommend you to follow ;
If you are looking for inspiration - we have bundled our process/know-how in a workshop.
Contact Pol Vanaerde - email@example.com