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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