Fear of Subscriptions? Three reasons software subscriptions make sense.

Posted by Tom Emmrich

Feb 21, 2014 8:47:00 AM

Subscriptions or Purchase

Software as a Service

As the market is rapidly getting more comfortable with cloud-based offerings and software-as-a-service (SaaS) solutions, there is usually a secondary hurdle that most customer’s struggle with, and that is the subscription payment method that generally goes along with these offerings. Some just don’t understand it and think it is a clever “trick” of the provider – and others hold the belief that they are inherently more expensive.  Neither is true.

While some people have an emotional connection to upfront payment, objection to subscription based offerings is usually not founded on an objective understanding nor an analysis of risk, total costs and flexibility.

Provider perspective:

From an offering provider perspective, the pricing structure decision is based on alignment with the provision of the offering, market dynamics (i.e. the way people would likely buy), and financial return.  Financially, it is simply a decision of over what basis to spread the very same anticipated costs and desired returns.  All product and service pricing must select a “unit of measure” upon which to base the price (per unit, per person, per month, etc.), and then a method with which to apply it (one-time payment, upfront plus ongoing “maintenance”, subscription, etc.). It’s important to note that payment methods, per se, do not make a product more or less expensive.

Customer perspective:

From a customer perspective, the question should be:  Does the payment model correspond to the nature of the offering, my usage, and the value I expect to receive?

There are at least 3 reasons/rationale for subscription based pricing:

1.  It is the most appropriate to the manner of offering delivery
2.  Better correlation to usage and value
3.  Reduced financial risk and increased flexibility

Appropriate to the manner of offering delivery

The most compelling rationale for subscription pricing is when it aligns with the way the offering is delivered.  If you are paying for an online/cloud service, then there is no “product” that is singularly delivered – it is an ongoing service you expect to use over a period of time.  The means of that service provision is built, maintained and managed by someone else.  If they go away – your service stops.  Therefore, paying via a subscription aligns perfectly with the provision of service…you keep paying, you keep using the service.  You stop paying, the service stops.  A one-time payment would be illogical and, even if available, it would make you very nervous of the ongoing provision of service. 

Better correlation to usage and value

Subscription based Software (SaaS)

Assuming the offering provider has chosen a variable for the subscription amount (per equipment, per user, per month, per output) that represents a reasonable surrogate for usage, then your payment should correlate well with the corresponding value.  Sometimes we think we are clever and are able to get more than we pay for.  Over time, it’s rarely true.  We do indeed generally pay for what we use, it’s just a matter of how and when.  Most subscription models align payment and usage directly together – the more you use (as defined by the provider’s model), the more you pay.  Within your business, subscriptions make it much easier to allocate costs across sites or business units, by using the same metric as the overall subscription charge. 

Reduced Financial Risk and Increased Flexibility

By greatly reducing or eliminating upfront investments that must be recovered over time, subscription offerings minimize your financial risk.  Rather than spending a bunch of money up front for hardware and software purchases, and hoping to cross the line of positive return somewhere in the future, subscriptions level out your payments with the scale of your usage, often enabling you to achieve near-term (sometimes immediate) ROI.  Your periodic subscription price often starts very small and rises as your usage increases.  Usage increases generally correspond to the opportunity for increased value (more people, more sites, more equipment,…).

Probably the strongest advantage of subscription offerings is flexibility.  Even in the case of modest termination charges, the ability to increase and decrease usage – up to and including cancellation altogether – provides you a level of freedom to avoid being locked in to an initiative that does not gain traction, and the ability to quickly and smoothly scale in reaction to growth, acquisition and expansion.  One-time-charge offerings, and their corresponding hardware and software which are “yours to keep”, often require exponential investments in order to scale.  In addition, subscriptions often allow addition of incremental functions and version progressions in a smooth or sometimes seamless manner, as compared to the upgrade charges and other “stair-step” elements of purchased offerings. 

Final Thoughts

These three items are just a subset of the rationale of subscription based offerings.  To be clear, there are also advantages to upfront purchases.  There is no “one size fits all” in the area of software and technology pricing.  Different models align with different offering types.  While clearly requiring a mindset shift, the advent of off-premise and software-as-a-service applications will increase the popularity of subscription pricing, which aligns very well to the period and usage-based provision of services these offerings represent. 



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Image Credits: TashatuvangoValentinT

Topics: Tips and Tricks, Energy, Software as a Service, Energy Management

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