The subscription economy continues to expand unabated. According to some people some estimates, companies using subscription licenses have grown three to four times faster than the S&P 500 over the past 12 years. Still, there is a growing imbalance between vendor profits and customer outcomes, particularly within SaaS.
The ubiquity and massive growth of licenses subscription have created a model which seems irreproachable. However, upon closer inspection, the software is no longer cheaper, broader, and more internalized for customers. Recently, companies such as Meta, Netflix, Microsoft, Oracle, SAP and Salesforce have announced price increases as high as 24% for specific products or services. A new round of layoffs in the technology sector. Somewhere along the way, economies of scope and scale have gone haywire, and enterprise customers have been stuck with the check, written month to month, user to user.
Instead of contributing to this chasm, software vendors can drive growth by passing on the inherent benefits of cloud and subscription licensing to customers. After all, this was the initial promise of the model about 20 years ago. In my experience, longevity in the market depends on increasing productivity, agility and results for business clients. In other words, adding value rather than restricting it will improve both the health and sustainability of the subscription economy and its merchants. Providers can approach this strategy in several ways.
Encourage flexibility
Migrating from one tool or system to another is laborious, expensive and disruptive to the client's daily work. When offered, trial accounts are underpowered and have data processing, storage, usage, and time period limits. Expanding customer testing in duration and scale has a double benefit for suppliers.
First, suppliers gain insights into how to aggregate the effect of users on business performance, resources, and costs, allowing them to modify their delivery and pricing without impacting existing paying customers.
Companies can stand out by offering solutions to the market with subscription licenses
The second benefit It is the growth of new businesses. As pointed out Harvard Business Review, the Financial Times conducted an experiment where they removed the ability for customers to see three free articles on their site, instead imposing a pay-immediate model. Their website traffic dropped 30% and they experienced a long-term decline in new subscribers. “Forcing all users to convert on their first visit would mean losing 79% of conversions, which equates to tens of millions of dollars in customer lifetime value.”
This is because customers prefer to experience a product and build trust with its manufacturer before making any purchasing decision. In the case of software, where deals can run into millions of dollars, companies would be happy to shop around until they find a suitable solution from a reliable vendor at a reasonable price. However, with the industry in its current state, they could be buying something forever with no way out.
Companies can stand out by offering solutions through a subscription license. By leveraging subscription management tools, reducing operating costs, and expanding and deepening offerings at consistent frequency and price, businesses can offer their customers greater flexibility.
Don't be greedy
After a long period of steady growth, efficiency and affordability, the software industry is now struggling with rising costs of infrastructure, research and development, staff and market penetration. Despite this, subscription licensing remains an industry stalwart, primarily due to its financial and operational advantage for providers.
The cost of entry for software customers is lower using a subscription model than with a perpetual license. However, on average, the cost of ownership will change within four or five years, meaning that businesses will eventually end up paying more for subscription-licensed software. Vendors understand this and work overtime to lock their customers into long contracts or make migration away from their product extremely difficult.
We've found that allowing customers to cancel their subscriptions whenever they want is mutually beneficial. Frees up resources within the organization to improve products, add new customers, and build public trust in the brand. On the customer side, the option to leave encourages them to look at their operations more closely and determine what they need and will use. Often, those customers come back and implement a different solution that better suits their size and scope. It's relatively simple advice, but suppliers do better over a longer period of time if they set reasonable prices for their products and let customers walk away.
Back to normal
Today, the tools and techniques available for providers to manage recurring subscription fees and develop new customers are abundant. Advances in this area are driving massive growth and adoption of the model. On the other hand, subscribers do not have any industry-wide standards or mechanisms by which customers can extract more value from their suppliers. In SaaS, the onus is on the provider to drive customer success, and the way the market is organized, there needs to be more incentives to do so, especially when costs increase for providers.
Streaming services are a prime example of this imbalance in action. Extreme competition and higher customer expectations have led suppliers to increase prices and reduce the quality and quantity of their offerings. These companies see consolidation and market capture as a better means of growth than investing in the strength of their existing products and their value to customers.
The same goes for technology, but a course correction is anticipated shortly. In a crowded field like SaaS, differentiation gains market share. However, only a few suppliers will put resources on the table to offer constant flexibility, affordability and product innovation to their customers.
