KEYnote 43 English - Spring/Summer 2022 | Page 10

L I C E N S I N G

1.25 Mio €

1.26

Year 1 Year 2 Year 3 Year 4 Year 5 P = Perpedual M = Maintenance S = Subscription New Licenses License Updates Maintenance Fees Subscription Fees

discount for the first two to three years from the original purchase . In our case , this would be a price point of € 2500.00 . If a user skips too many updates or exceeds the three-year period , they would have to buy again the entire package at full cost .

For maintenance subscriptions , the annual maintenance fee would be 12 % to 25 % of the purchase price , i . e . the user would pay an addition of € 600.00 to € 1250.00 for maintenance services on top of the original € 5000.00 product license .

Monthly maintenance subscriptions would usually range between 2 % and 5 % of the purchase price , i . e . € 100.00 to € 250.00 per month in our example . Depending on the contract , payment can be per month , quarter , six months , or year .

Which opportunities and risks should be expected ?

Consider the opportunities and risks for this specific example . We assume that our business gets a hundred new customers purchasing the product in the first year and that we will be able to increase these numbers by 5 % year on year . We also assume that updates are offered for half of the purchase price and that half of our current customers will take us up on that offer . This immediately shows one of the typical risks of a purchase model : Without exciting new “ killer ” features , very few users will be tempted to buy every single update .

For a comparison with maintenance subscriptions , let us assume that 75 % of our users buy a maintenance contract at 20 % of the purchase price and that 10 % of these will exit their contracts every year .

For a subscription license , we can assume a monthly fee of 4 % of the purchase price , only 5 % churn per year , and 25 % more customers attracted by the more appealing payment option . Since users who cancel their software subscription cannot enjoy their product anymore ( compared to maintenance subscribers ), far fewer of them will take this drastic decision and stop using the software altogether .

The comparison shows how subscription licenses outperform conventional purchases in the long run – even if only 25 % more new customers can be sold on the new model . The data does reveal that a revenue slump needs to be expected in the first years , especially if an established product needs to be transitioned to a subscription service . Introducing subscriptions needs persistence and perseverance . A good compromise is to introduce new products or new markets under the subscription model and to let older products slowly run their course .

Maintenance subscriptions , by comparison , are essentially risk-free , while also promising attractive revenues over the long haul , especially if customers can be kept on board . It is not unheard of for established companies to get substantially more revenue from maintenance subscriptions than from new licenses .

The eventual business plan for a new subscription service has to take the market and customer preferences into account in every case , and any sample calculation or projection can only serve as a general point of reference for decision makers .

Everybody Wins ? The advantages for providers are plain as day : With maintenance subscriptions , but even more so with software subscriptions , they win new , lasting , and predictable revenue streams at lower commercial risk . But the users also benefit , again especially with software subscriptions . The most immediate gain for them is the far lower entry cost . Instead of spending € 200 to € 300 for the full suite of MS Office products , they only need to pay € 10 a month for the subscription . Another advantage may not be as obvious at first , but will soon make itself felt : Subscriptions usually mean constant access to the most recent software versions with the most recent security standards . No need to buy a new software version again when the next update rolls around .

A greater feature set is another typical advantage . The typical buyer will only spend for the applications and features that they need at that moment , whereas a subscriber can get access to a larger , often complete set of features and functions . This can be as simple as certain functions in Excel that most would have never noticed if they had not been included in the subscription – but which quickly become a favorite choice if one has them available .

Subscriptions have become the norm in the music industry , and they are becoming normal in the car industry . Who still buys CDs ? Most people subscribe to a streaming service to get all the freshest beats without spending a penny extra . True , most people will not listen to all of the music library . Who in the world would be an avid fan of Brazilian metal , Europop , and 80s one-hit wonders at the same time ? As these examples and the success of video streaming sites have shown : The subscription age is here to stay .

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