KNOW-HOW
Greater Revenue with Subscriptions
Successful brands like Adobe , Microsoft , and Sony are convinced : Instead of selling licenses , their users can rent their software and services . These subscriptions guarantee a lasting and predictable revenue stream . But is this model suitable for all types of software ? What do software developers have to remember when they introduce subscriptions ? This article answers both questions .
What are subscriptions ? Subscription can refer to many things in the software industry . The most traditional meaning is a license subscription . In this case , the user does not buy a permanent license for a piece of software , but instead rents the software . Technically , it is a license with a defined expiry date . When the license expires , the user loses his right to use the software . The advantages are simple : lower upfront costs , fair billing for the actual rental period , and software that is always up to date .
Subscriptions can also refer to special maintenance arrangements . Such maintenance subscriptions have the user buying the actual software and then subscribing maintenance services . The user has the right to use the software indefinitely , even after the subscription expires . However , during the subscription period , the user has guaranteed access to new versions of the software . When it ends , the version is , in a sense , “ frozen ” at that point in time . Technically , the license is a permanent license with a defined-duration maintenance agreement .
Hire purchases are not technically subscriptions , even if the term is commonly used to describe them . In this case , the user pays for the software in installments . When the last payment has been made , the user gets full and indefinite usage rights . This is a particularly popular model in Latin America . On a technical level , it is a temporary license that is transformed into an unlimited license after the final payment has been received .
Pricing A rule of thumb for pricing software subscriptions is that the rental price should equal the full-purchase price after 2 to 3 years of use , i . e . the monthly rental payment should be between 2 % and 5 % of the full price . Annual maintenance fees should be between 12 % and 25 % of the purchase price . Hire purchases usually have installments over a period from 1 to 2 years , with interest rates between 5 % and 20 %.
Is a subscription the right choice for my product ?
There is no one correct answer for this question , because the calculation depends on many different factors . Let ’ s imagine a case with the following setting : As developer , I will reach 100 new buyers per year with my software priced at $ 5,000.00 . Typically , half of them will buy an update after three years , for which they would pay half the original price .
I expect that 75 % of my customers would buy maintenance services if I offer a maintenance contract . This would cost 20 % of the original software ’ s price , and 10 % of the subscribers would cancel the contract after a year . I also offer the software on a subscription license , at a fee of $ 200.00 per year . 5 % of these subscribers can be expected to cancel their subscriptions every year . These are fewer cancellations than in the case of the maintenance contract , because the users could not use the software at all anymore in this case . The lower upfront cost suggests that I might reach 25 % more new clients in the first place , even though this depends a lot on the
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