Software companies are never done. There’s always a new major version to ship, an expansion into a new target audience or geography, or a new product that your existing customers may be interested in.
Over the last 5 years we’ve seen hundreds of companies selling Mac, Windows or SaaS software go through the same stages again and again:
- What billing model is best for my product?
- How do I determine the best pricing?
- What’s the best launch strategy?
- How do I mobilize an audience at launch, and keep momentum going?
We’re using this experience and diving into the data and the insights and stories we collected to write the comprehensive guide to launching a new software product, version or market.
We’ll be writing a series of chapters over the next months, culminating in a comprehensive guide.
We’re starting with one of the most important topics: picking the right billing model, from a one-off license with time-limited trial to a seat-based subscription model.
In this extensive billing guide you’ll learn:
- The importance of the right billing model and pricing
- How to understand and determine your customer personas
- Deciding between one-off, subscription or a hybrid billing model
- Which of the various types of one-off purchases is best for you
- Which of the various types of subscription billing models is best for you
- Whether you should consider a hybrid model between one-off and subscription
Section 1 - The Importance of The Right Billing Model and Pricing
Launching a new version of a software product is a complex affair.
Whether it’s a brand new product, a minor or major upgrade or an expansion into new audiences and markets, you need to figure out quite a few things, including:
- Who the target customers are
- Where they are and how you’re going to acquire them
- The features you need to build
- The benefits you will communicate
- The launch timeline
Determining how you are going to make money - what billing model, which price points - is one of the most important decisions you can make that will impact the ultimate success of your launch.
Customer Monetization Plays a Huge Role in Your Success
It’s however surprisingly the part on which software companies tend to spend the less time - in our experience, a couple of hours of research and meetings is not uncommon. In comparison, think of how much time you spend talking to customers or thinking about your roadmap.
There are typically three main ways you can grow your business: acquire more customers, monetize them better or manage to retain them longer.
Most of the advice you can find online tends to relate to customer acquisition, when any improvement to monetization is, in our experience, much more effective.
Spending time figuring out the right billing model and pricing will therefore have a major impact on your business. There are however still other reasons to look into it, beyond revenue optimization.
Your Customer Relationships Are Affected By Pricing
Although price optimization may sound like a spreadsheet exercise run in a vacuum by a smart bunch of data scientists, your decision will impact how your customers see you.
Price too high, and you will have damaged the trust they placed in your product and your brand. Hearing the dreaded “you don’t respect the early adopters anymore” can happen faster than you think.
Price too low, and you will lower the perceived quality of your product. There’s a reason Apple doesn’t sell cheap iPhones. This may also lead to an unsustainable model where your customers expect to pay your app $5 and receive updates for life.
Pick the wrong billing model - a flavor of subscription, one-off or a hybrid model - and you risk killing conversion rates and creating a vocal backlash of your existing customers.
Of course communicating your benefits and pricing the right way can minimize these issues.
Communicate a strong, differentiated value proposition (like Apple) and premium prices can follow.
Explain why you can be cheaper without compromising on quality (a technical innovation, cutting the middleman…) and lower prices can become a key selling point.
Section 2 - Understanding your Customer Personas
Customer Personas are a very important exercise, not just for pricing but for product, marketing and positioning in general.
They simplify and classify your ideal customers into clearly identified personalities, with pain points, way to look at the world, day to day routines etc.
To take an example, an antivirus software may have a couple of different customer personas, with a very different use case, decision making process and pricing structure:
- Individuals who struggle with computers and just want to be protected
- Individuals who are looking for a comprehensive solution with antivirus, firewall etc. at the cheapest cost possible
- Businesses who want to protect their teams and network from intrusion, and are looking for a custom solution and ongoing monitoring and training
As you can imagine, the way you price for each of these customer personas would be very different. Not understanding their differences would make it extremely hard to make any pricing decision, let alone build and market the right product.
Avast’s pricing page for individuals focuses on a free basic product, and a unique premium product, with several add-ons that get added on the checkout. No price is mentioned - potentially to ensure anyone not ready to buy just yet downloads the free version.
Their business pricing however displays a clear price per device and year, and offers no free option but instead a progression with additional features for the most selective.
Strong customer personas have the benefit of having everyone in your teams speak the same language when it comes to customers, and make decisions with specific people in mind.
What Does A Good Customer Persona Look Like?
Customer Personas are slightly different if you’re a B2C company selling to individual customers, or a B2B company selling to decision makers in other businesses.
It’s actually very common for a software company to target both personas, with a different value proposition, pricing and experience for each.
They typically include:
- A name and photo, to make them as personal as possible - “Carol the Cost Conscious” or “Martin the Marketer” for example
- Their background and demographics: their work or role, age, gender, income, location…
- Their goals: what are they trying to achieve that your product can solve?
- Their challenges / pain points: what are the real problems that your product can solve?
- Their objections: what is worrying / confusing / annoying them in your product?
- Your positioning and benefits: how do you pitch your product? What are the “wow moments” for your customers?
How Can You Create Customer Personas?
Start by talking to your customers, or potential customers.
Complement it by listening to sales calls, diving into product usage, reviewing support tickets and spending time in any other window into your customer’s minds you have at your disposal.
If you are targeting B2B customers, it’s much easier to have a discussion with them than if you sell $7 apps. Make sure you ask “why?”, as great personas understand and explain the rationale / motive behind customer behaviors, rather than describing symptoms and signals.
If you are targeting B2C customers however, in-app feedback and surveys are often more effective (even though they do not replace direct discussions with customers).
As an example when working with one of our vendors on their growth opportunities, we noticed that many of their customers, who had a professional email address, had purchased a family pack. After surveying this previously unidentified segment, it turned out that they were purchasing it for their business and that they could be better served with a dedicated product and billing model.
As people are notoriously unreliable in describing their own expectations, focus on asking for clear examples when they’ve had to do something in the past, and dig to understand when they had the problem, why they decided to look into it and how things went from there.
The Mom Test is also a good resource for further help in having efficient customer interviews and get to the real important insights.
Section 3 - Determining the Right Billing Model
Billing models are only limited by your imagination (or what your tools let you do).
To keep it simple, we’re going to consider the main 2 models - one-off and subscriptions, with in-between hybrids.
We’ll then dive into the subtleties of each model: in app purchases, time trials, per seat and metered billing…
One-off, Subscription or a Hybrid Model?
To determine the right billing model for your launch, analyze the following factors for each of your customer personas:
- How will they use your product?
- How often can you ship value-driving updates?
- What costs will you incur from their usage of your product?
- How easily can they commit to using your product?
How will they use your product?
Will they use the product on a daily basis, or very punctually? Subscriptions tend to work best if there is a frequent (one might say recurrent) use.
Will they use a strictly defined set of features, where only minimal improvements will occur? If so, they’re more likely to be seduced by a one-off purchase, rather than a subscription model justified by new features of which they don’t see the value.
If on the contrary your product can expand in scope, add lots of new features that will be desired, a subscription model can be more appropriate.
Zeplin is a product that helps designers hand off their work to developers. It is used on a daily basis with a large scope: for example, as part of an ecosystem of designer tools, it could integrate or start competing with other tools, focus on more and more parts of a designer workflow, etc. It’s therefore perfectly adapted to a subscription model.
On the other hand a tool to create a logo within 2 minutes may be used a couple of times only, unless its focus is on professional designers. A subscription model would not make sense and an one-off purchase, potentially with a free trial or in-app purchases, would be more appropriate.
How often can you ship value-driving updates?
A corollary of the frequency of your customers’ usage is the frequency at which you can ship updates that add a lot of value to their usage of your product.
If you ship constant updates that add no value - for example because that customer persona is happy with a basic set of features - or ship very few updates to a product that encurs no real recurring cost to you, you won’t be as able to justify a subscription model as customers may feel exploited.
If on the other hand you ship regular updates that keep adding more and more value for you customers (this is the case for SaaS for example), a subscription model can be a solid option.
What costs will you incur from their usage of your product?
Are there significant costs such as storage costs, that are derived from their usage of the product? Subscriptions with metered billing, or a one-off price with in-app purchases, are more appropriate. This is for example the case for Dropbox or Twilio.
Do you need to support customers for their ongoing use of your product, or do you focus on purchase and billing queries? The former favors subscriptions, whilst the latter tends to indicate a one-off model.
It’s important that your billing model is sustainable. Ongoing support costs make it much easier to justify a recurring model, as users can understand the reason why you charge them on an ongoing basis and can feel that they are supporting a product they love.
How easily can they commit to using your product?
How expensive is your product? If you need to charge thousands of dollars, subscriptions can be a good way to lower the perceived cost of the solution. If on the other hand you’re aiming at impulse purchase, one-off will convert much better than the feeling of commitment that comes with recurring billing.
How long will it take for customers to be convinced to pay for your product? There are a couple of ways to give a taste without much commitment or decision making, until customers are convinced: a freemium subscription plan or a one-off purchase with a trial based on time or features are the best options.
How easy is it for them to stop using you? If there’s a high churn risk, for example if your product is a gadget app, go for a one-off purchase to capture all of the value instantly. If your customers are in it for the long haul, you can consider subscriptions.
How About A Best Of Both Worlds?
We haven’t yet talked about the hybrid models. They’ll be a good fit if you find yourself in one of these 4 scenarios:
- You want to derive value from both types of models: the predictability of subscriptions and the ability to ship often, whilst appreciating that some users don’t want to commit to yet another recurring cost or don’t care about frequent updates (these are arguments that Sketch and Agenda made eloquently).
- You’ve asked yourself all these questions and come up with good reasons for both one-off and subscriptions.
- There’s no clear answer either way and you’re going to need to test to figure it out.
- You simply have a strong opinion on what pricing should be like - in our experience this is typically the case if you dislike the concept of subscriptions but find one-off purchases too limiting.
If that is your case, there are two main hybrid models you should consider:
- Offering both a subscription plan and an expensive one-off perpetual license, like Pinegrow. A/B testing them is not a bad idea.
- The so-called “Dutch Model” where customers buy a one-off license, with free updates for a specific period (typically one year), pioneered by the like of Sketch and Hedge.
The Various Types of One-Off Purchases
This is the simplest, and oldest model: simply giving a copy or perpetual license code in exchange for a fixed sum.
This approach is particularly interesting if your product fits some of these criteria:
- Apps that are not used regularly
- Low price point
- Impulse purchases
The main drawbacks of this model? Cash-flow and frustratingly infrequent updates.
First you need to do all the work upfront without any revenue. Secondly, you typically experience a couple of weeks (or months) with very high order volumes at launch, followed by lesser sales over time. Thirdly you need to bear the cost of any new feature or support request until the next major paid release.
This bears a real risk: as opposed to the predictability of recurring monthly revenue coming from subscriptions, if your next major version doesn’t sell well you could end up in real troubles, without any forewarning.
It is also very frustrating to have to sit on many developed features, sometimes for 12 months, until you can launch a major version you can charge for. UX improvements, features that your customers are constantly asking for, or that your competition just launched…
If you take this approach, you therefore need a solid grasp of your financial needs and an excellent understanding of your customer base and what product / pricing combination you can offer.
Do your customers see the value of your product instantly? If not, it’s worth letting them try it for free, prove that value and then sell your software.
You can achieve this with either a time-based trial, a usage-based trial or a feature-based trial (or more rarely, a combination of these). You should decide which one suits your product best by figuring out the best way to showcase the full value of your product.
One-Off with Time Trial
Most time trials consist in a 7, 15 or 30 day free trial.
Skylum offers a powerful photo editor but occupies a highly competitive and crowded software segment: letting users test the software for a limited period can alleviate fears and increase conversion rate.
This trial mode is ideal if the value you provide takes time to demonstrate. Is there a significant learning curve? Do people see results after they’ve used it a couple of times? Is your product linked to a specific lifecycle, e.g a week’s worth of team work?
One-Off with Usage Trial
Alternatively you can also limit based on the number of uses - generating 3 reports, converting 1 file…
This is especially interesting if your ideal customers could batch all their usage in a short period of time - for example converting thousands of files, analyzing many websites for keyword research…
This mode is also very appropriate if you know the tipping point when customers are hooked. For example CleanMyMac is free for the first 500mb of data cleanup - just enough to prove that it works, whilst making sure that customers are left wanting more.
This is one of the benefits of using an in-app checkout like the powered by our Mac SDK: frictionless purchase when reaching this tipping point is incredibly more effective than redirecting the user out of the app and into a website.
One-Off with Feature Limited Trial
Time or usage trials are not recommended if you’re selling a product where you see a high level of disengagement quickly after purchase, for example a short game or a one-off use.
Take for example a product converting video files into different formats. Two customer personas come to mind: people who wish to regularly convert files, and people who just have one file they’re trying to convert.
If you want to monetize the latter, you’re better off with a feature limited trial - for example applying a watermark to the video file to show that it works whilst encouraging a full purchase for real use.
Similar examples include antiviruses, PDF compressing softwares etc. The cycle is simple: prove the value, reach maximal buying intent / frustration with the limited version, offer to bring that value with a full purchase.
One-Off with Additional In-App Purchases
In-app purchases (IAP) can help you expand the functionality of your product in a more modular way.
You can for example introduce new features as an in-app purchase rather than calling it a new version of your software.
It also lets you cater to different customer personas within one software: for example offering dashboards and analytics as a paid add-on for the CFO persona.
IAP can be a first step towards a more recurring billing model, if you want to experiment with subscriptions.
You can for example sell additional seats, or usage-based packages as IAP, without jumping to a monthly subscription straight away. This is a great way to gauge customer appetite and understand the unit economics in practice.
IAP can also be extremely successful if you’ve built a thriving community around your business. Content IAP such as training material, design templates, icon packs etc. created by your community have many benefits:
- They incentivize and reward user generated content - no work for your product or marketing team!
- New ideas you’d never have considered can come from the fans, helping you build a strong product overall
- You can generate significant additional revenue
The Various Types of Subscriptions
Subscriptions imply a recurring relationship - but should you charge based on time, usage, seats or a combination? To decide, you need to figure out your Value Metric.
Determining Your Value Metric
At its core, your Value Metric is simply a smart-sounding way to express what you should be charging for. It could be API calls, number of SMS sent, number of invoices created, number of users…
Figuring it out is very important. Doing it well means that the value you provide and the price you charge are aligned - if you do it really well, the value grows faster than the price.
On the other hand doing it poorly leads to frustration and churn as your customers look for solutions that are more adapted to their needs.
In terms of maturity in your billing model, the simplest way to charge subscriptions is to base it on frequency: $10/month. The next stage is to charge per user: $10/month/user. But very often you can unlock more growth by tying your pricing to that one metric, and it’s worth making a conscious effort to decide if you have a Value Metric you should use instead of the simpler plans.
What does a good Value Metric look like?
- It’s dead simple
- It’s linked to the needs of your customers
To determine it, it’s worth thinking about how you communicate pricing. There are two axis and your Value Metric is at their intersection:
- Packaging: the contents of each plan you offer
- Positioning: the difference between each plan
To determine your Value Metric, follow these three steps:
- What does each of your customer personas value in your product? For a helpdesk solution the support team may value team work whilst marketing values integrations with marketing automation and CRM systems.
- What are the simplest elements in your product linked to what they value? For the support team this could be the number of users, or the number of tickets created. For the marketing team this could the number of integrations available, or the number of API calls.
- Which element will grow as they grow and be understood? A B2B helpdesk may focus on premium support, i.e offer unlimited agents but charge per account helped, whilst a B2C helpdesk would charge support teams based on the number of agents. Marketing teams are more likely to be able to predict the number of integrations they need, making it a better Value Metric.
You end up with one single Value Metric per persona. It could be the same for each persona, or vary: this keeps it simple for each, whilst letting you differentiate pricing accordingly.
HubSpot is a good example of a mature SaaS pricing. Their Value Metric is the number of contacts, with feature-based plans and in-app purchases thrown in for maximal adaptation.
Frequency-based subscriptions charge customers a fixed amount at a fixed frequency - for example $15/month.
Businesses typically offer several plans, starting with a potentially free plan (with limited functionalities or a limited time period). Plans are defined by a combination of:
- Available features - e.g all standard features in the basic plan, and additional reporting in a more expensive plan
- Usage restrictions - e.g up to 5 projects and unlimited projects
- Team size restrictions - e.g 1 user, 5 users and unlimited users
- Support - from onboarding help to dedicated Customer Success to uptime and SLA guarantees
Framer offers a free plan as well as personal (for the freelancer persona) and company (for the team persona) plans.
Splitting it in two reflects the fact that freelancers tend to stay freelancers: showing all plans on one row would be detrimental as the two personas are exclusive, rather than a natural evolution from one into the other.
The personal plans differ on the level of support, whilst the company plans differ on features, number of users and level of support - clearly reflecting the higher complexity in the needs and usage that companies make of their product.
The Custom plan also moves to seat-based billing as opposed to frequency-based billing, which is very common for B2B SaaS.
It offers 2 different frequencies: $4.99/month or $39.99/year (i.e a 33% discount), as well as prices in various currencies. These prices are properly localized: rather than applying the FX rate, they have opted to adapt the price based on factors that could include local purchasing power and minimal friction with a simple price (£3/m instead of £3.28/m for example).
Bear follows the same approach with a simple monthly or annual plan.
Defining what fits in each plan is much easier if you have defined your customer personas and their value metric well - user research is critical.
You will also be tweaking these plans by analyzing product usage and behaviors after your launch: real data can be much more insightful than research!
Frequency-based subscriptions are often a less granular version of usage-based or seat-based subscriptions.
To decide between a frequency or a usage subscription, figure out whether your customer personas have a predictable number of units they will use. If they do (e.g < 1,000 invoices, 1,000 - 10,000 invoices, > 10,000 invoices) package it in different plans. Otherwise scale your price with your customer usage.
Usage subscriptions tend to be used by Web-based SaaS companies. Desktop-based products for Mac or Windows generally avoid this type of subscriptions as they don’t work as well.
Charging per seat is not new - it’s the logical extension to the old practice to sell individual licenses to each user.
This mode of subscription is ideal if the decision to use your software is made by the head of a team or company and where each user will use your product actively. This is the case of a helpdesk software or sales CRM. It adds flexibility, as companies will be charged as they grow.
Zendesk is a good example of a seat-based subscription model, where all agents are actively using the software.
If on the other hand your software tends to be used by individual users, who may convince their colleagues to use the same software as them (for example a todo app), a seat-based approach may add friction to the early adoption. Creating a plan for up to 3 users (as shown in Framer’s previous example) would allow them to test the solution, then move to a team plan.
If many users don’t use a product actively, charging per seat is not ideal: charging for passive users (who consume reports or export invoices for example, and therefore don’t tend to get as much value from the platform) could indicate that the value metric has not been correctly analyzed.
This makes sense as all employees of a company are active users, and the decision is much likely taken by the engineering or operations team on behalf of the whole organization.
TextExpander offers a mix of a frequency-based subscription, focused at individuals, and a seat-based subscription for teams.
The Various Types of Hybrid Models
As we’ve just explained, one-off and subscription are the two extremes in terms of billing models for Mac and Windows software products (Web software tends to be SaaS, where these hybrid models don’t apply as much).
|Subscriptions||Predictable cash-flow||Customer backlash|
Hybrid models have emerged to mitigate the drawbacks of each model: the first one offers a combination of both one-off and subscription, whilst the other one offers a model which is in the middle of both extremes.
Offering Subscription and Perpetual License in Parallel
What do you do if you can’t, or don’t want to choose? You offer both.
Pinegrow offers the option of a one time payment offering a perpetual license and a year of free updates (the so-called Dutch Model that we’ll explore right after this section), or a monthly subscription.
The license is equivalent to 12 months of subscription: it’s therefore interesting for customers who like the current product and are ready to buy but care less about future updates.
On the other hand the subscription model lets customers try the software with little risk, thanks the ability to cancel at any time - and offers the guarantee that they will always be on the best version of the software.
It’s a good idea to compare conversion rates with or without these 2 prices. Does the license improve conversion rates and overall revenue, if you were only offering subscriptions? And vice-versa if you were only selling one-off licenses. If you can now target more customer personas, this is likely to increase both conversion and revenue.
Not everyone stays with this model: Flixel used to offer both but has since migrated to an annual subscription-only model.
The Dutch Model: Limited Free Updates and Support
The origins of the name “Dutch Model” are nebulous (it seems to have emerged because Dutch companies like Sketch pioneered the concept), and we’re not quite sure that this is an industry-standard terminology just yet. If it does, we’ll be glad we helped!
The principle is that customers can buy the software and use it forever, which removes the objections linked to subscriptions (“I don’t want one more subscription and don’t care about updates, I just want to buy the product”).
Updates and support are limited to one year however, which means that users who care about the additional features that get added renew their license each year - generating a stable cash-flow rather than the typical peaks and valleys that one-off purchases create at launch.
Companies using this model tend to feel that people should pay at a regular cadence for updates to their app, and the updates warrant a recurring cost. However, they appreciate that not everyone may want the updates or the commitment of a recurring cost. As a consequence they don’t auto enrol customers, who pay annually for upgrades (optionally) or stick to the version (and functionality) they’re on if they fail to pay.
Sketch does a great work of communicating the value to both types of customers:
- “You can keep using the last version of Sketch you downloaded, forever” gives piece of mind to occasional users.
- “Over the past year we’ve released 18 Sketch updates” shows the value of the year of free updates, whilst communicating the interest to pay year after year since there are so many product improvements being rolled out constantly.
Hedge offers a slightly more complex pricing. All licenses include one year of updates, and they offer three licenses:
- A project license targeted at the “odd-job” persona, which is only valid for 30 days and is extremely economical.
- A full license which lets small and medium companies scale based on the exact number of employees they have.
- A site license which lets medium and large companies optimize their costs at scale, with a 20 seat license costing as much as 6 seats of the individual license.
We’ve reviewed the wide variety of software billing models and the methodology you can use to decide on the right one for your new product upgrade or launch.
The next step consists in determining the actual pricing you should offer, and how you can communicate it in a compelling way.
In the next chapter of this series dedicated to helping software companies succeed in their product or version launch, we will dive into the magical world of pricing and answer the key questions such as the right price point, how to price an upgrade to your existing product and whether you should charge existing and new customers differently.
Stay tuned to our future content on that theme by subscribing to our updates - as a bonus you’ll receive a comprehensive eBook with unique examples and data analysis to help you make the most out of your launch!