Software has been undergoing a major shift in recent years. Changing user expectations and improved cloud technology have progressively allowed software merchants to opt for ongoing subscription delivery models over one-time product sales. And while companies in every industry have been exploring subscription-based business models, software has been particularly keen to embrace it. Phenomenal growth seen by Software-as-a-Service (SaaS) startups has convinced even established veterans in the space, like Adobe, to completely switch delivery models
In addition to technological advances allowing easy adoption, the change to ongoing service subscriptions has proven advantageous in other ways. While the primary reason for changing delivery models within software companies is the appeal of stable, recurring revenues, getting to market quickly, ongoing improvement and providing users with a lower upfront cost are all drivers for change.
The fundamental characteristic that differentiates subscription models from one-time software purchases is their ability to generate recurring revenue streams. If you can attract and keep customers over a prolonged period of time, you can actually generate more revenue over the long-term than through one-time sales.
This promise of more overall revenue from subscriptions has garnered strong interest from investors who have been paying a premium price for firms that can demonstrate a potential for robust recurring revenue. One example of this is Slack, which recently raised $180 million.
Unlike a one-time sale product, SaaS lets you launch a minimum viable product quickly. From that point, you can then work with early adopters to modify your product and incorporate features based on real customer experiences.
Path is a good example of a service where the creators envisioned the value of their product differently than actual users. Originally developed for sharing mobile phone photos with friends and family, many users saw the app more as a kind of journal through which they could connect with those closest to them while on a platform more private than Facebook. Accordingly, users wanted to share not just their photos but thoughts, locations and music as well. Once the founders realized this, they were able adjust their service development to better cater to this kind of use.
Users should already be getting value out of the minimum viable product you created to help solve some specific problem. But the challenge (and advantage) of a subscription model is that you don’t stop there. You need to continue to deliver value to keep subscribers onboard and that’s where your repeated interactions with users becomes a distinct advantage.
User feedback and usage patterns can help better inform the development of SaaS products so that your service can become even more valuable to users over time.
Subscriptions allow merchants to effectively mortgage their costs over a longer period of time. In turn, this enables merchants to lower upfront costs for their users who may be more willing to pay smaller, more affordable amounts over time instead of a large one-time price. If users stay signed up for long enough, companies should more than make up their costs.
The growth in the SaaS industry demonstrates that many believe that the advantages of a subscription business model for software outweigh the risks. With the appropriate foundations and a commitment to customer success in place, merchants can successfully achieve robust recurring revenues to pour back into what you does best: developing products that keep getting better and help your customers. While it’s certainly a different way of doing business, the SaaS model is an exciting opportunity to expand the scope of your customer relationships and deliver ongoing value for both you and your customers.