Subscription based software: Does it work?

Question

A while back I worked with a software company that sold a specialized software product. Ever so often they would release a patch for free and a new version that would require an upgrade fee. This is typically how the software industry works.

After some time the company decided on a new strategy, Subscription based software. This turns out to be a way for the software company to charge a small, incremental fee for each "transaction" that is performed on their software. Under this model the patches and upgrades were included in the per/transaction fee and there was a 'true up' in the number of transactions every so often in order to collect their fees.

To me this seems like a better way to develop and sell software. The software company gets continual income stream, the customer doesn't have to worry about upgrade costs and such, and if the customer gets really big then your income stream grows with their growth.

The problem (and reason for this question) is that I don't see anyone doing that anymore. Is it because this model doesn't work? Have I taken an overly simplistic view of developing and selling software without seeing some of the negative sides of this model?

[EDIT] I am interested in the developers opinion on whether writing Subscription based software is a good way to develop software.

So this question is directed towards the professional developers who have worked on commercial applications: Can anyone speak with experience on this model and why it does/doesn't work?

Answer 1

I used to work for a company which moved from product license to subscription based model. Here are some observations about that:

1. Offer both product license and subscription models
2. In product license: user buys 'n' number of seats for their use.
3. In subscription models, customer buys your software for 'x' months time and 'y' people.
4. It will help you a lot if your company also develops 'consultants' who will work with your customers to get the software implementation etc at client site (any required installation, training etc)

In fact if you see services like GMail enterprise, Fogbuz etc they give different pricing options:

• where you want the app hosted: your servers or their servers
• you will be charged $x per number of people using the software

I think a subscription model (time based) will definitely work in the current times and in fact the cloud model helps towards such freedom in revenue models: for example, you can choose to 'subscribe' to a cloud database rather than purchasing a database server.

Answer 2

It's not exactly the same but basecamp from 37Signals is very succesful with a monthly fee basis, and FogBugz also uses the same model. The approach you're talking about here seems similar to the MircoPayment idea that was seen as a revenue earner in the early days on the web. I'm not sure if anyone succesfully made money from that model, I'm sure a lot of VC was spent trying.

[Edit] I think this an exellent way for small ISVs to run their businesses. The combination of SAAS and subscription is a great way of getting revenue quickly. There are a number of advantages

1) Continuous revenue

2) Small or zero initial payment, brings customers in, beats that credit card price point issue (it's easier to charge $10/month than $100 one off)

3) Builds a solid relationship between ISV and vendor

4) Chance to upsell, assuming the offering is good

And the only way you're going to be a big software vendor is by being a small one first.

Answer 3

Due to the nature of software development a subscription based model is really the way to go, but how do make sure that you have continues updates that actually make software worth subscription fees.

If you're providing a service it's a lot easier to motivate subscription frees but if you're planning on having people pay monthly for monthly releases, well than that's a thin line between success and utter failure. I don't see how this would work with most software.

Update: @Dscoduc

I would call that a service then. Make a clear distinction between software release schedule and support. If you want to charge for a premium support deal well that service gonna have to be pristine. But I do see how it could work. People might end up buying subscription based software on the premises that they will be able to tailor it to fit their needs without programming experience and at a low cost.

Your challenge lies in being able to listen to your customers and really find a way of taking their feedback and making that the foundation for your software life-cycle and that's not going to be an easy thing to do.

Maybe we should petition stackoverflow for a way of marking content not related to programming but interesting to programmers.

Answer 4

Yes it does. See salesforce.com for an example.

Answer 5

Red Hat seems to think it works. Buy a year of support get all the upgrades/etc/etc. Except they let you keep the product when the year is up (so.. I guess customers like that too =).