During the last two years, we’ve seen an increase in adoption and transition from the traditional license-based model towards a subscription model. There are a number of theories as to why this change is happening; the Wall Street Journal puts forward the universal benefit of customers receiving flexibility and convenience, while the subscription companies develop a closer relationship that in turn creates a more predictable revenue stream.
If we look towards the future, Gartner has stated that “by 2020, all new entrants and 80% of historical vendors will offer subscription-based business models”.
Subscriptions as a trend
To see how subscriptions have become attractive to the software economy, you only need to look at a service like Setapp, which some have likened to a Netflix for apps. Using Setapp, you pay a set fee and gain access to a variety of apps, rather than tie yourself into buying those apps as one-off purchases.
When we assembled a founders panel at WWDC to discuss moving to subscriptions, the main reasons they decided to move included:
- Predictable, sustained revenue for marketing and advertising budget
- Customer complaints about paying twice to use on more than one platform
- Not being held to the major version update cycle
A McKinsey Study on the top reasons people would accept subscriptions over one-off purchases found that flexibility and the reduction in up-front and total cost to be the main factors. This trend of not feeling tied down to a service reflects that customers skew heavily towards value and pricing as key choices when choosing a subscription.
Is your business model right for subscriptions?
Subscriptions allow greater freedom for the consumer, but for true subscription suitability, you’ll also have to consider how customers use your product. One method to see subscription value is through brand positioning, demonstrating your product’s true potential, perhaps as something to complement their career, rather than just as a hobby product.
There’s also the case of apps where the need for them might be very infrequent, but the cost of keeping subscribed would be worth the price to access the product whenever the need arises.
Four key changes to make the transition to a subscription model
When altering your model, you’ll also need to examine what added value your subscribers are getting. This value can come from:
- Updates which wouldn’t be defined as major updates, but serve to improve upon the current product and the features available.
- Your subscribers can also help you iterate on the product, by suggesting subscriber-only features and exclusive content to them.
- Your level of support will also need to be amplified to deal with customers, as those on a one-off plan may be more forgiving but when paying a month-on-month price, they’ll want a timely response to any queries.
- Access management in the form of cross-platform access will also be handy for customers looking to use your app on both Mac and iOS seamlessly.
Not all subscription models are created equal
When looking to migrate, there are a number of subscription models to consider. A few common types of subscriptions you can offer are:
Usage-based is more of a pay-as-you-go model, allowing your customers to pay for when they’ve used the product within the billing cycle. Usage can come from the number of emails sent or projects created. A potential downside will be the inconsistency of MRR because of differing usage from your customers.
Seat-based is when you charge per user; it works best when dealing with bigger businesses whose seats will increase as the company expands. Access management is a useful add-on, allowing your customers to tier what level of admin access they want to give people in their company.
If you want to smooth the transition when implementing subscriptions, you can offer your product as both a one-off purchase and on a subscription basis. You’ll need to differentiate the two by providing support and updates for a subscription tier and letting the one-off purchasers keep their current version of the software.
What to expect after making the change
Communication is key. A blog is an easy way to announce a change to your new subscriptions model. Your post can be based on the questions your customers may have, the benefits of your new model, what they will gain by switching to your subscription package and what will happen to customers sticking to the one-off model.
Another aspect to consider is if you make a complete shift to subscriptions, in the short term, a slight decrease in revenue may occur. This revenue drop, however, will allow you to gain a more sustained income. In the case of Flixel, who made a successful move to subscriptions by offering one-off, monthly and annual subscriptions to ease customers into the transition, it started with 50% of customers on subscriptions- and now 90% of their customers are on a subscription plan. They eventually grew their lifetime value by 29%. This approach is more gradual but can maintain customer goodwill by allowing them to choose.
Having a subscription-based model is soon going to become the norm. To embrace this shift you’ll need to find a model that suits your goals as a business and decide how to add value for your customers that subscribe. With this in place, you’ll create a sustainable revenue source for your business and create a product that reflects what your customers need.
If you’ve picked up a subscription model already and are looking to deal with post-subscription chargeback and churn, check out our how to succeed with subscriptions blog.