Why Software Companies Should Consider the Subscription Business Model

 
 
 

Modern businesses are showing increased preference for SaaS solutions offered on a subscription business model. It’s easy to see why, as we’ve become accustomed to services like Netflix and Spotify that operate on a subscription basis. This line of thinking is becoming more and more prevalent also in the B2B software space.

Where once a “one-size-fits-all” business model - the perpetual model - was the business model of choice for software businesses, that is no longer the case. While in the good old 1990s it used to be nice and simple for software companies to sell their product on a buy-it-once-own-it-forever basis, the world is quickly moving towards a subscription software model and software publishers have to keep up with this shift to avoid getting left behind and to maintain their competitive advantages.

So, here’s our explanation of the basics of the software subscription business model, how it works, and the key pros and cons you should know before pulling the trigger on change.

 

Basic Concepts of the Software Subscription Business Model

First off, let’s define some scope. As experts in software licensing, we here at 10Duke are going to talk about the subscription model in the context of software businesses.

While the subscription model is by no means limited to software (want to buy a car with a subscription? Volvo says hello), we will mainly talk about it to the extent that it applies to software companies.

 
 
 
 

 

SaaS & the Subscription Software Model

You are probably also aware of SaaS (Software As A Service), which our friends at Software Advice describe as “a method of software delivery that allows data to be accessed from any device with an internet connection and a web browser”. SaaS is very often spoken in conjunction with the subscription software model, but they are not synonymous.

In a nutshell, SaaS is a method of delivering software to your customers, subscription is the terms in which you collect payment from your customers. Thanks to the rise of cloud services you can now make it very easy for your customers to start using your product. In other words, the barrier to entry can be made considerably lower these days.

 

The Subscription Model Lowers the Barrier to Entry

By the same logic, you probably begin to see why the subscription software model is becoming more and more popular - why wouldn’t you lower your customers’ barrier to entry by also making the financial side simple and easy for them?

We can now hear someone in the back muttering something along the lines of “but what if they don’t like my product and only use it for a month and then cancel and I’m left with a fraction of the money I would have gotten with the perpetual business model”.

Well, our answer to that is that customers have become more demanding. They want to try things out before they commit. If your product is good, they will stay. And if you’re operating in the B2B space, chances are they won’t cancel quite as easily as it’s more likely that they have a legitimate need for the product, as opposed to to pure B2C cases.

 

Perpetual Model vs. Subscription Model

One more thing that we should explain before going any further is the fundamental difference between the perpetual model and the subscription model - the old vs. the new.

The main difference between them is that if you, as a software business, sell your product with the perpetual model, you are essentially selling a physical product which your customer now owns. In contrast, if you offer your product on a subscription basis, you’re essentially renting out your product to your customer. You are only selling the right to use your product. In other words, you’re selling a licence.

This is essentially how SaaS companies make their money - they sell licences to their product. They don’t sell the product itself.

Historically, the perpetual licensing model has been very common as it is one of the original license models. However, software vendors are moving away from it, simply because there are more effective licensing models that allow software vendors to improve how they monetize their software applications.

Read Licensing as a Service to learn why licensing is increasing in popularity

10Duke is an expert in software licensing, where you license your software out to your customers and make sure that only those who have paid for the right to use it have access. 

If you want to learn more about what your software business can achieve with a robust and modern licensing engine like 10Duke, you can find more information here.

 
 
 
 

 

What Are the Main Advantages of the Subscription Model?

So why is it that the subscription software model is so attractive?

There is no clear-cut answer to this as each business is slightly different, but certain key advantages seem obvious. As we said earlier, we will focus on software businesses here.

 

Changing Customer Expectations and the Barrier to Entry

First off, there is more competition these days as customers’ expectations have changed. For software businesses this means that they don’t want to be the only company in their respective market that is lagging behind while others are more forward-looking.

If your competition offers a no-obligation subscription for $99/month and you’re still offering a one-time payment 10 times the money, it’s easy to see why your customers don’t want to commit. Your product might be better and even cheaper in the long run, but the risk of initial cost is a real thing for the customers of the 2020s.

The perpetual model isn’t dead, but its inflexibility, high initial cost and risk to customers are pushing more and more companies towards the subscription software model. Perpetual business models are becoming less relevant because consumption patterns and expectations are changing.

 

Flexibility For Both the Customer and the Software Provider

It’s easy to see why the subscription software model offers more flexibility for the customer - try it out for a few months and cancel if you’re not happy, plus no costly initial payments. It’s simply easier for the customer to make a purchase decision.

But what’s often lost in the discussion is the fact that it offers more flexibility also for the software subscription companies offering their products on the subscription basis.

 

Always Offer the Best Version of Your Product

A good example of this is when you continuously update your product with new features and security enhancements. It would be common sense to have all your customers using the latest version of your product - you want to offer the best possible product, right?

 
 

Allow Customers to Choose Their Preferred Subscription Tier

Offering several tiers of subscription is another way in which you give more flexibility to your customers but also benefit yourself. If your customer just wants the basics, they can pick the most basic subscription tier. These customers probably don’t require your attention quite as much.

But if they are more demanding (for example enterprise customers), you can offer a more expensive subscription tier where your most important customers will, for example, get more support from your experts. This way you’re making sure that you are allocating your resources effectively.

 

Know Your Customers - Build Better Relationships

Knowing your customers is of course the key to a successful relationship between you and them.

With a subscription, you will have more access to your customers. For example, you can require them to receive your newsletter with the subscription. That allows you to upsell higher tiers of service, educate your customers about new features, help them with tutorials, offer success stories - whatever you think helps keep your customers happy and feeling that they get real value from their subscription.

Conversely, being closer to your customers allows you to gain insights into their thinking. What do they like about the service and what should be improved?

In a world that is more connected than ever, why wouldn’t you try to take advantage of this? To build a happy relationship with your customers you first have to know them.

 
 
 
 

 

Big Changes Are Easier to Make and Growth Is Less Painful

One more advantage for the company is that you will be in a better position when facing major changes.

If you’re offering products on the perpetual model, you might find yourself in a situation where several old, outdated versions of your product are still in use somewhere and you may not even know who your customers are. How are you then going to enforce a big change in your product/service for those customers? We’re not saying it’s impossible, but it will be a headache tying up those loose ends.

With a subscription software model, you’re basically centralising and simplifying your whole product, which allows you to enforce big changes more easily to all of your customers. It will also make growth less painful, as there are less moving parts that need to be managed.

 

Make It Simple - No Surprises

Customers ultimately want a simple service that is easy to use with no surprises - especially surprises that are financial in nature.

For example, if you’re offering a product on a one time purchase basis but also charge maintenance fees, you run the risk of having unhappy customers. Nobody likes to pay extra.

At the same time, if your team has to spend a lot of time and effort on fixing issues for your customers, you do want that work to be compensated. That’s why it would arguably make more sense to offer a subscription that includes everything from the main product to any additional support fees.

 
 

Pros and Cons of a Subscription Based Software Product

Now that we’ve mentioned several advantages for both you and your customer, let’s do a quick pros and cons comparison.

 
 

PROS

 
 

Increased user base - more earning potential?

Subscription models require less of an upfront buy-in, making them more accessible for clients of all sizes. This can massively expand your client user base, which can drive positive change for your service and help streamline onboarding and client management.
 
 

Predictability

Monthly recurring revenue is the backbone of healthy operations and paves the way to expansion. Having a calculable revenue stream helps validate business planning and remove volatility and risk from budgeting.
 
 

Virtuous Cycle

All digital services should aim to bring improvements to clients. As they grow with your help, their needs will expand as they move from strength to strength. This can empower you to create personas and roadmaps for your users, bringing additional business and revenue as users upgrade and expand their subscriptions.
 
 

Relationship Building and Loyalty

Clients come to depend on your teams and their expertise and service. Having a subscription-based model facilitates opportunities for relationship building and information capture. This can help facilitate the co-creation of value by securing feedback from key clients and building change into the system.
 
 

CONS

 
 

Cancellation Rate

The biggest challenge facing subscriptions is when users fail to roll over to the next month. While relationships should be managed with clients and customers, failure to renew can sometimes seem to come almost out of the blue. This can produce gaps in revenue that may need significant effort to plug.
 
 

Risk and Business Model Change

Adjusting finance and billing configurations will always invite risk. Switching to a subscription based business model needs to be carefully considered. The change affects legacy, current, and prospective customers; all of whom may have unique issues dealing with a change to the model.
 
 

Value Justification

Your teams will be securing client revenue on a monthly, quarterly, and annual basis…and will have to justify it. Client management comes to the fore with a subscription based model and it will become necessary to demonstrate immediate and ongoing value to secure the client engagement that you need.
 
 
 
 

 

10Duke Can Help You Transform Your Software Business to the Subscription Model (and beyond!)

As a software licensing provider, we’ve seen the explosive growth some of our customers have achieved in the past few years. Many of them use some variations of the subscription model to license their product to customers.

How does software licensing relate to the subscription model, you might ask? We’ve written a full article on the importance of software licensing, but we’ll give a shorter summary here.

Simply put, it's no longer financially viable for software businesses to offer a 'one size fits all' perpetual software license model. If you're a software vendor, you may need to offer multiple license types for the same software product – potentially even offering several different license types to the same customer.

You also need to be able to reliably revoke access to your software when the rights and entitlements of your customers change to protect your software intellectual property. One of the most common problems software vendors face is having to revoke access manually, which takes a lot of time and effort that could be used more effectively elsewhere, like working on your product.

We’ve also seen that the subscription software model isn't always versatile enough if you want to license your application in a more specific way. Check out the links above or this article here where we cover some alternatives to the subscription licence model.

The subscription software model is also popular among software vendors because it is the main license model supported by payment providers such as Stripe and Zuora. They make it easy for content providers to deploy the model, offer discounts, track usage, process payments on a global basis, reconcile local taxes (in some cases) and easily integrate the payment engine into their own websites.

None of these things are simple to implement. Especially if your business is growing fast we’d be willing to bet that whatever internal system you have for licence management, access control and user management, at some point it will no longer be feasible to manage manually and you’ll want to look for a modern, automated way to deal with all of that hassle. That’s what 10Duke specialises in.

10Duke provides you with a robust, modern and flexible software licensing engine, together with full-scale customer ID management. 10Duke is easy to integrate to most CRM, E-commerce and Payment Providers. With us, you can create a comprehensive framework that can be configured to match your needs. Follow this link to learn the basics of how 10Duke can help your software business.

 
 

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Modern businesses are showing increased preference for SaaS solutions offered on a subscription business model. It’s easy to see why, as we’ve become accustomed to services like Netflix and Spotify that operate on a subscription basis. This line of thinking is becoming more and more prevalent also in the B2B software space.

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