Software Subscription Pricing – Scaling Subscription Revenue with Customer Usage

Subscription pricing has been a revolution for software businesses. While it is often tied to SaaS offerings, it can be equally applied to server or on-premise based software. I think of subscription as a business model and SaaS versus on-premise as a deployment model.

I believe there are two reasons subscription pricing has been revolutionary for the software industry:

  1. because customers have proven time and again to prefer subscription pricing over perpetual licenses because it removes the risk of an upfront purchase and lowers the barrier to entry by matching regular payments to be better timed with the value they receive from the software; and
  2. because it created ongoing, predictable revenue streams for the vendor with a higher customer lifetime value.

I remember 10 years when at MYOB we predominantly sold our small business accounting and payroll software as a perpetual license.  Approximately 10% of clients would purchase the software but never register it!  This meant they’d paid the full, price upfront and didn’t get $1 of value from their purchase.  Under a subscription today, MYOB offers a standard 30 days free so those clients can sign up for a trial and then only pay if they really love the product.  For years MYOB offered the two pricing models side by side, but very quickly subscription became the preferred pricing model.  From MYOB’s perspective over the expected lifetime of a customer the business would receive 2.5X more revenue, allowing a much larger investment in innovation, driving more value to customers and thus what I think of as the virtuous cycle of subscription pricing kicked in.

Subscription pricing, however, is particularly nuanced.  Moving an existing software product from perpetual to a subscription adds a degree of complexity; and migrating clients that have existing perpetual licenses to subscriptions adds further degrees of difficulty. 

We’ll write about and share our views on all components of this science (some may call it an art) over time, but for now I thought the article linked to below was a good starting point.  It highlights what it refers to as ten different pricing strategies.  I’d call them more scaling drivers, in that they show different ways in which subscription pricing models can be designed to grow revenue as customer usage increases and customer value grows.

More on subscription pricing to come!

Tim Reed,

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