Why isn't most software sold based on a subscription model? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Ajit Kulkarni, VP of Product at Chronicled, on Quora:
When you bought your last laptop, chances are, you paid a one-time fee to download a software onto your computer—think Microsoft Office or Adobe Photoshop. And now, you simply use your applications without worrying about paying for them again.
A few years down the road, you may want to upgrade to the newest version. In this business model you’d pay another one-time fee, essentially buying the newer product.
But the business model used by most Software as a Service (SaaS) providers is a subscription-based model.
And this model is different. Instead of one large upfront payment, companies generally charge a small monthly fee. If a customer wants to quit using the service, they simply notify the provider and stop paying the fee when the contract is up.
There are plenty of examples of pay-as-you-go models, in large part because the entire industry is experiencing a mass transition to this system. Netflix, Salesforce, Slack and Microsoft Office 365 all use SaaS subscription models. Even Adobe has switched over to a subscription plan.
While the one-time fee based model has had a good run, for many users, subscriptions are a welcome change. But this change requires a significant transformation in SaaS providers’ mindsets, since it has major implications for their businesses.
Here’s why some companies haven’t made the switch to subscriptions:
The subscription model requires a new thinking from everyone.
Typically, subscription services do not require long-term contracts. If a customer is unhappy with the service or sees a better deal elsewhere, they can cancel at any time.
It’s much easier for customers to drop a service now, and that requires a change in mindset if you’re a SaaS company. In one way or another, every department has to accommodate the transition to a new business model. Here’s what that looks like:
• Product and Engineering
The internal product and engineering teams have to continue delivering new features. They no longer have the luxury of working on a new product for two or three years. Adding new functions and innovating based on customer feedback is now a constant process.
If a competitor offers the same functionality for a cheaper price, your customer may leave. And if they offer more functionality at the same price—or even at a slightly higher price—you may also face customer defection.
• Customer Support
The customer support role also changes in a subscription-based service. In a product model, if a customer has a bad experience with support, they may forget about it by the time they’re ready to upgrade the product. But when a customer can choose to drop your service next month, a poor customer service experience can be disastrous. This team has to be more obsessed with offering great customer service now.
Marketing must always make a conscious effort to retain the customers and get them to engage with your service. If someone has a bad experience, address it immediately. Monitor how customers talk about your service in public forums. And always be on the lookout for users of competing services. They maybe unhappy with your competitor and interested in you.
The focus here is not only on closing a sale but keeping existing customers happy. But a side effect of switching to a subscription model is the commission structure changes. Instead of fat one-time commissions, the team may have a commission structure that considers monthly subscriptions and customer lifetime.
The CFO and finance department also need to adjust accordingly. That’s because the software as a product model produces uneven revenue.
When companies like CISCO or Microsoft used to sell package software and hardware, they would experience variations in revenue from quarter to quarter. It was difficult to know exactly when a customer would decide to upgrade to the newest product. In good years, their customers might invest in the newest product offerings. But in a down economy, they may wait to buy, which could send revenues plunging.
However, with a subscription-based service, companies can reliably bring in the same fee each month the customer is using the service. This can make the process of raising money easier as you simply show the monthly recurring revenue or number of paid users. Even Wall Street likes the subscription model since it allows them to predict revenues and earnings more accurately over time. And the CFO has to keep these things in mind while managing investor expectations.
Without innovation, customers may forgo service.
Companies are often faced with a choice between building their own products and buying one from a SaaS provider.
For example, if a company uses Amazon Web Services (AWS), it’s initially paying a manageable monthly fee for its IT infrastructure needs. But as the company scales and requires more infrastructure, the cost of using AWS goes up. If the company eventually has thousands of employees, it may be paying tens of thousands of dollars a month to use AWS.
Now the company is faced with a choice.
Does it continue paying that monthly fee, or does it take on a one-time cost to build their own in-house data center? It may be extremely expensive, but in the long run, it could be less expensive than using AWS.
However, the decision doesn’t always come down to cost.
AWS will continue to innovate and add features at a much faster rate than any in-house system can. It’s their speciality. It will also be easier to scale with AWS. They innovate to make it easier for companies to say, “It won’t be worth it to build our own system. We can live with the cost of using AWS because it’s a better product and it allows us to concentrate on our core offerings.”
Constant innovation and the addition of new features is the key to staying one step ahead of the “build” mentality of your customer.
Offers have to be attractive enough to retain customers.
There are essentially two ways to retain customers through a SaaS subscription.
1. Great Experience
One way is to make the product and the system so easy to use that customers will never leave you. Slack is a good example of this strategy.
Slack began by targeting employees rather than management. Their app was very easy to use, and people typically had a good overall experience with it. So, employees began asking management to implement Slack. And over time it replaced many of the traditional messaging apps. They’ve continued to add functionality and price their service affordably—and now they’re the premier messaging app for businesses.
2. User Engagement Via Data Stickiness
The other way to retain customers is to make sure they are putting their data into your system.
For instance, most people who have Gmail have built up a large amount of personal data in their account over the years. I wouldn’t leave my Gmail account because it has all my emails, history, and files.
Now, I also happen to have a Microsoft email account that I hardly ever use. It would be very easy for me to leave that account because I prefer my Gmail, and I don’t have much data in the Microsoft account. The more engagement and data you collect in your app the harder it is for users to switch from you to a competitor.
These are the issues SaaS companies have to be thinking about when they transition to a subscription-based business. Overall, a customer-focused mindset and a desire to keep providing value is necessary to be successful with this new model.
This question originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.