Subscription Business Models For Software [GUIDE]

Everything You Wanted to Know About Selling Your Software as a Subscription

SaaS has been one of the most common software monetization strategies for Consumer-based and enterprise software alike. I can still remember back in 2012 when Adobe decided to switch to a subscription business model for the applications they sold. Their stock valuation would indicate that this transition was a success, as the the inflection point to the "hockey stick" graph seems to coincide with this transition:

In this post I'd like to cover some key considerations around providing Software as a Subscription, both from the perspective of the ISV, as well as from the Customer / End-User's point of view.

How Do Consumers Benefit From Subscription-Based Software Licensing?

There are a few reasons why consumers would enjoy using software licenses as a subscription.

Significantly Lower Upfront Costs:

The greatest benefit for consumers when using SaaS is a lower upfront cost to use, since the entry point for a customer would simply be a monthly subscription rather than the total lifetime cost of the license. If we take the example of Adobe Photoshop again, that meant people could immediately derive value from the software for $50/month for CS6, whereas the perpetual license cost $699, making it prohibitively expensive for many creatives.

Continuous Software Upgrades, Updates, and Patches:

Gone are the days where end-users expect rare software updates, or want to pay for them separately. With a subscription business model, software vendors can offer a single application, and continuously upgrade it without having to worry about licensing different product versions. That means less hassle for the customer, and they can focus on using the software as a service rather than figuring out how to upgrade to get the latest feature.

Should All Software Vendors Adopt the Subscription Business Model?

At the very least, every software vendor should consider selling their software as a subscription, as there are many benefits.

Continuous Software Updates Simplifies the Product Lifecycle Management

Maintenance for the Software Vendor is simplified, since all of the end users are entitled to the latest version of the app. Taking Photoshop as an example again, Adobe used to have to manage support for all major versions of the same app (CS1 - CS6) prior to consolidating everyone into a single app.

A Subscription-Focused Business Model Almost Always Increases the Customer’s Ltv for the Vendor

From our experience, most software vendors that use LicenseSpring as tend to price their subscriptions in such a way that their perpetual license would be paid within 12 to 24 months.. That means, if the end user remains a loyal customer and regular user of the software beyond that amount of time, the ISV will extract more revenue from each customer in the long-run. It's important for most software vendors to have the means to maintain and support their software, which usually means pricing the product in a way that can cover the cost of a team of developers, and infrastructure.

The Software “Market Landscape” Can Force All Vendors to Become a SaaS

Sometimes, it's simply not possible to license your application using any other business model, since you would just be crushed by your competitors if you can't keep up with their engineering and their marketing budgets. Let's say all of your competitors sell as a subscription, and use the higher LTV to ramp up their marketing and ad spend to gain more visibility toward prospective clients, and continuously increase the budget for R&D. Competitors who cannot afford the marketing and the product development dollars will gradually become irrelevant. I have seen this with many License Managers that we used to consider competitors, that simply could not keep up without being a SaaS.

ISVs Should Be a SaaS if Part of All of Their Service Is Delivered Online

Web services all inherently have some component that can justify recurring revenue, since their economics also have recurring costs (servers, databases, etc.).

Cautionary Side-Rant: Subscriptions Can Be a Race to the Bottom.

If every vendor offers their software as a subscription, then the costs for a consumer to switch to alternative are also very low. If you are considering being a SaaS business, then you better make sure your business is tight: The service should work flawlessly, be well documented, and you should provide responsive and helpful support at the very least, frequently improving the product with updates and bug fixes, or else expect many customers to churn.

It might simply not make sense for customers to pay for a subscription. If your software changes very infrequently, with few updates being made, or if the end-user does not use the software regularly, they will start to question a recurring fee. On a personal note, I am quite uncomfortable with the fact that with a SaaS, I do not “own” the software, and that gets switched off if I no longer pay for it, even after being a customer for 2-3 years. My default state is to assume a vendor is simply looking to overcharge their customers.

How Does a Software Vendor Implement a Subscription Business Model?

It's quite simple really, you just need to make sure that the state of your software is synchronized with the state of the system you use to keep track of the subscription. For example, if a subscription is active, the software should work. If the subscription is cancelled, the paid portions of the software should no longer work.

There are definitely a few edge cases to consider if you wanted to license your app as a SaaS: Someone might have cancelled a subscription, but remains an active subscriber until the end of their subscription period. Another one is how to handle offline license checks around renewal dates.

LicenseSpring allows Software Vendors control the state of their software application according to their license agreements. In the case of subscriptions, we synchronize the license validity to an external source of truth, such as a recurring billing system (like Stripe), CRM, or ERP.

What Alternative and Complementary Business Models Are Out There?

There are many ways to license an application to customers, and often times a mix of tools are what is the most reasonable between customers and vendors. Here are some of the most popular ones we see in our customer base:

• Per-Use: The software vendor meters the usage of the application, of some of its components, and sells "credits" which get consumed. LicenseSpring is a sort of per-use business model since we charge based on API requests.
• Perpetual + Maintenance: The Software vendor grants the right for a customer to use their software forever, but pays periodically fees to have the right to upgrade their software to the latest version. This model makes sense for companies that have major releases annually and minor releases that are relatively infrequent, or for vendors with software that is rapidly evolving, and the vendor wishes to charge for the new features and functionality.
• Floating Licenses: We see this business model requested often by end users, and is usually deployed for expensive software. Floating licenses allow the end user to install the software on many machines with a restriction put in place on a number of simultaneous uses of the application. One industry this is common in is access to a database, for example.
• Time-Limited: This is a business model where the license is set to expire on a fixed end date with no assumption that it will be renewed, and the software will no longer work after that date.

Last Updated: September 21, 2022