A quick note about reality and purpose.
As with any advice, it doesn’t always apply to you and your business. Lets go over some things to make sure you are getting the right takeaways from this article.
Know what your mission is.
Your business goals determine when and how you make money. Investors play a big part of that. If your company’s mission is to create short-term revenue you can ignore most of this article.
This article is about human-centered business practices. The ideas in this article are about long-term gains in your customer’s lives, and the economy in general. Making decisions that positivity affect long-term successes are the types of decisions you should be making.
Of course there needs to be a balance, but there are ways to make sure you don’t have to make a damaging short-term decision. If you make sure you have enough of a financial buffer and are frugal in your day-to-day operations, you will not need to make as many decisions that require short-term gains over long-term successes to stay afloat.
When it comes to business models, over the last few years I have starting seeing these through the lens of an educator and designer. My main goal is to improve people’s lives. I believe that economies are not zero-sum games, and that a rising tide raises all ships.
Generally speaking, subscription-based software brings in more revenue.
It’s true. When it comes to software markets such as phone apps, subscription-based services bring in more money. But that’s an average of the entire industry. That doesn’t necessarily mean a subscription business model will bring you the most amount of revenue for your software. A subscription model might provide fare less value to your customers, causing them to bounce and go to your competitors.
In short, it doesn’t mean the business model that on average brings in more money will be the best fit for your product. I think we can all agree that not all products should use the same business model.
The subscription model is absolutely justifiable in some scenarios. In the case of software, if a customer is using a significant amount of server resources (more than just for authentication), then the subscription model makes perfect sense. Services like Trello, Notion, and Artlist are great examples. The monthly fee is justified because the customer is using a non-trivial amount of your server resources.
When your product is storing data created by the customer, the freemium business model should be used, where there is a free plan and a premium plan with the rest of the features. Customers can try before they buy, which is good for conversions. But the important aspect about this model is that if a customer stops paying they will still have access to all of their work. If you chose to use a subscription model, as a business it is your moral obligation to allow customers to retain access to their work if their subscription ends. Disable the features, but don’t delete the customer’s data. If you choose to delete user data, you must have well-tested ways for users to export their data in open/usable formats, and a long enough period for people to download it on slow connections.
If the software’s function is not to be a database for user-generated data (e.g. something besides Jira and Trello), and is primarily a creative tool where the servers are used for authentication only (e.g. Adobe Creative Cloud), you had better make sure that your customers are getting regular updates to their software. Instead of, you know…using those funds to create apps that designers don’t want.
Investors may pressure you to make your business subscription-based.
This has become a trend I’ve been noticing. I’ve encountered products that had no reason being subscription-based. When those businesses were asked why they chose that business model, they said that their investors insisted. It makes sense. Subscriptions are a very stable sources of revenue, and it takes a lot to anger a customer enough for them to cancel a subscription.
Products solve problems. How someone pays for your solution to that problem is part of the solution you are giving you customers. You will probably had both the solution and the payment method figured out before an investor tells you to make your product subscription-based instead. So now instead of solving a customer’s problem, you are solving your investor’s problem. By making it a subscription you may be making one product for two completely different customers.
The way customers pay for a product is a large part of their experience. It is part of the solution to a problem. If the business model hurts your customers, it can then become a new pain point that they didn’t have before. What will the solution to that pain point be? Fleeing to your competitors, and sharing their poor customer experience with the rest of the world.
There are millions of un-tapped customers out there that will not buy a product because it’s a subscription.
“Subscription fatigue” is a real thing. When I see software with a monthly subscription, it’s immediately a turn-off. I’m not paying $15/month for a note-taking app. If all my software was subscription-based I would be broke! Most creatives today are multi-disciplinary, and they need a lot of software. As a creative who has subscribed to Netflix, Adobe Creative Cloud, Trello, JetBrains, O’Reilly Safari, Pluralsight, MediaFire, Discord, Microsoft Office 365, Elementor, and Artlist, I feel like I’ve hit “peak subscription.” I’m always trying to find ways to cancel any subscription service I have.
I’m not taking on any more recurring fees that are not directly tied to running my business. The value proposition has to be immense for me to subscribe to another piece of software. Historically, I’m much more likely to make a one-time purchase of $150 than to pay $10 a month.
In user experience design, we talk a lot about friction. Friction is the enemy of design. Subscriptions can create an immense amount of emotional and cognitive friction. This is especially true in people that are thinking about how much a product costs over the course of a year. As soon as someone pulls out a calculator, you’ve lost the emotional battle for that customer. You want people to feel good about purchasing your product, not research it and determine if your value proposition is worth the actual cost of ownership. Because chances are, it won’t.
Who are hit the hardest by subscription software?
Now, all of that has been from the perspective of people who are doing pretty good financially. There’s a lot of creative talent out there who are not doing well financially through no fault of their own. I’m talking about teens, students, recent graduates, and marginalized people.
A parent is more likely to make a one-time purchase to aid in their child’s development than adding another monthly fee to their household budget.
A mentor can make a one-time purchase to help a mentee out, but a mentor can’t really commit to a recurring monthly fee.
A low-income creative who has to save money to purchase software can make a one-time purchase and be done with it. However, a subscription would require them to change their lifestyle permanently to afford that service every month. If they can’t pay, they lose it, and their investment vanishes.
Subscription-based software can prevent your customers from earning money.
I had an experience where a freelancer I knew was having a difficult time making ends meet. They couldn’t afford their Adobe Creative Cloud subscription that month. Adobe locked them out of the software, and they were unable to continue freelance work. Freelance was their only source of income. Let that explode in your head for a moment. Because they couldn’t afford to pay Adobe, they couldn’t work to make money to pay Adobe again.
Where are they now? Instead of renewing their Adobe subscription, they jumped ship. They are using Affinity Designer, Affinity Photo, and Affinity Publisher so that experience never happens again.
Alternative business models:
So what are the alternative business models?
Purchase once, keep forever.
There’s the “purchase once” model. It’s great for customers who impulse buy software (like me), but it’s harder for software companies to get recurring revenue. If your software doesn’t get upgraded very often, then this is a business model that matches your product well.
This is also great for parents who purchase software for their children, and creatives who need to save money so they can have access to competent tools. As an art teacher on the side, this is the reason why most of my students purchased Clip Studio Paint as opposed to Adobe Photoshop. No economic hardship will ever prevent them from using the software they need to make a living.
Purchase once. Upgrades are extra.
I think this is the best business model for creatives. ManicTime is a good example of this. I purchased it once, and decided not to renew because times were tight. I was still able to use ManicTime for its intended purpose for as long as I needed to.
But after moved and set up a new business, I was able to justify the expense. I purchased ManicTime again for another year’s worth of updates.
Again, this business model may fall short if you are not adding enough extra value to the product over time, usually in the form of features. As for as the value that customers are receiving, it might as well be a “purchase once” model because your customers won’t want to upgrade to get the new features. So don’t expect the revenue of a subscription model if you are not updating your software.
Adobe Photoshop is a good example of this. To this day I know people who are still using CS6 because Photoshop is not that much better than it was back in 2012. If you a creating a new piece of software with lots of growth potential, then the “purchase once, renew for upgrade” model is a good choice.
Regardless of whether your software is updated regularly or not to justify the annual upgrade package, I think this business model for software should be the default one. It will allow your super users to continuing subscribing even if they are not getting much added value.
Have both subscriptions and perpetual licenses.
A clear benefit of subscription software is that it allows customers to pay very little to start using very expensive software.
When Creative Cloud first came out, I was fresh out of college and was making the decision to purchase the Adobe Master Collection, which contained every Adobe product for $2,600. The alternative was to pay $50 a month to get access to the same software. (As a CS3 owner, I was able to get a discount for the first year). For me, Creative Cloud was a no-brainer, even at it’s full price for the second year.
If your software is very expensive, then absolutely give people the option to rent it.
The option to pay more and get a perpetual license without updates would be useful for creatives who don’t need to be on the cutting edge of their tools. This benefits scrappy creatives who don’t have a stable income and use their software only occasionally. Income stability is a huge issue right now in 2020, and likely in 2021. It would be best for business to accept what the new economic realities are going to be and provide solutions to these types of customers.
I can’t stress enough how bad it is for creatives who can’t create wealth anymore because they couldn’t afford their subscription that month. It puts breaks on parts of the economy and it takes away the buffers creatives need to weather financial storms.
Fair pricing in a perfect world.
I would love to see a system where software pricing would be like taxes: your annual income dictates how much you pay for software. This will let software companies charge similar rates but also allow more people to “grow up” with their software and adopt it as full-paying customers later. The problem with this system is how to prove that a customer qualifies for discounted pricing. Many companies already do this using the honor system by having individual and business licenses with the same features.
A “software grant” that allows lower-income people to use your software would be a great benefit. Adobe, please do this. I don’t think you can claim “Creativity For All” until you address how your subscription model affects low-income creatives, self-taught students, and recent graduates.
What about student discounts?
Unfortunately, these are going to be used less often as fewer people qualify for the discount. Currently, most software companies only give you a discount if you are a student at an accredited university. With 4-year colleges becoming less desirable, you will have fewer people qualifying for student discounts. Student discounts also alienates a large community of people who can’t afford college. Software companies should provide more opportunities for self-taught students, as it better matches the reality we are seeing in the world right now.
And lastly there’s the problem of what happens after a student graduates. The norm is that they lose the ability to use the software they learned in school because they have to pay the full price (you know, the price that assumes you have a job), thus preventing them from using their software to create income. Many recent graduates have to freelance between graduation and full-time employment. Please don’t forget about them.
Why should it be easier for low-income people to purchase software?
As a society, we need to amplify the voices of marginalized and underestimated people. We need to help those who have few opportunities to grow. It’s such a big issue that we at Squirrel Logic have made it our mission to be a design and development agency for underestimated people.
Think about how your business model will be contributing to the prosperity gap. Are you only providing services to the highest earners in our society, or are you providing a way for people to create new opportunities for themselves? If you provide more opportunities for low-income customers, it plants the seeds for them to become full-paying customers later. It gives them the opportunity to become middle class, which benefits you and the whole economy.
A rising tide raises all ships. Helping the marginalized and underestimated helps build your customer base and creates more paying customers.
We know that the subscription model can prevent people from being able to continue making a living using that software. The good news is that there are alternatives for many creatives. This is especially true for graphic designers and video producers. Instead of Adobe Creative Cloud, you can get Affinity Photo, Affinity Designer and Affinity Publisher. For video and audio editing, you can get DaVinci Resolve for free (their pro version is reasonably priced too).
Instead of having a business model that alienates a wide group of people, consider creating more nuanced and effective business models instead, one that creates more opportunity instead of less.
Do your research. Make sure your research is human-centric. Talk to potential customers who won’t use your software, and find out why. If you listen to their stories, it will shed light on how your product can be a better solution for more people.