Apple’s recent announcement that it was opening up the Mac App Store to subscription pricing for developers raises a lot of interesting new possibilities. Phil Schiller’s news has kicked of a huge deal of buzz on what this might mean for pulling in new sales and customers for software developers.
But coming from my corporate background, I’m still trying to get my arms around why developers have such a romantic view of selling via the subscription method vs the old fashioned upfront pricing model. In theory, it doesn’t matter.
But coming from my corporate background, I’m still trying to get my arms around why developers have such a romantic view of selling via the subscription method vs the old fashioned upfront pricing model. In theory, it doesn’t matter.
In a theoretical world, whether you price your product with a one-time upfront price or monthly fee, the revenue is the same. But in the real world, it’s no contest. Corporations always prefer receiving as much revenue upfront as possible. Whether it’s through selling their product at full price for an expected life of many years or a prepaid subscription for as long a period as possible. A dollar today is literally worth more than a dollar tomorrow. And that works to the advantage of customers as well. Corporations usually pay for products and services up front if it’s cheaper than paying for by the month.
A business that can get customers to pay up front for future services rendered has effectively garnered itself zero percent financing for operations. Talk about positive cash flow. You have money flowing in for services that you haven’t even rendered yet. That’s money that you can use to hire more people or invest in new capital assets. No bank required and no interest paid.
Another reason that upfront pricing is more desirable for the seller than subscription pricing, is that subscriptions shift the balance of power to the customer away from the seller. There are some situations where a corporate customer is willing to forego an upfront pricing discount and pay the monthly subscription premium. If the customer feels that there is any doubt regarding future product quality or the seller’s viability he wants to hold the power of the purse. If the buyer withholds payment from the seller, the onus is on the seller to make things right. If the buyer had paid upfront, the onus is then on the buyer to prove his case in order to receive a refund or replacement. At the very least, the buyer can cancel his subscription and cut his losses.
So with all the advantages of upfront pricing for the seller why would anyone look to pursue switching their customer base over to a subscription model? Only one reason really. Increased sales. Absent a significant revenue increase, I can’t think of a single reason why any business would prefer to receive several small payments versus one big one. But there is always going to be a segment of your target market that may not be able to afford the full price of your product. If you can offer a pricing model that pulls in a whole new group of buyers that would be a strong incentive.
If the root problem for developers is that the market won’t pay for software then the introduction of subscription pricing probably won’t change the current state of affairs. That’s because customers instinctively know that you actually pay more for a product when you split it up into many payments. If they’ve already balked at the the lower upfront price, I don’t think they’re going to jump at a higher priced subscription model.
Or if the upfront prices have been too low and customers have been conditioned to think that nothing should cost more than five dollars, nothing will change until developers stop working for free. Just like in manufacturing, nothing will change with software pricing until the weaker parties give up and leave in search of greener pastures. The remaining developers will be able to raise their prices and hold their market.
My feelings on this subject haven’t changed. I still think that both options need to be on the table. Those customers with money in hand should have the option of paying the upfront discounted price. These customers should be rewarded for their trust in the seller and handing over cash which can be used in financing the business. Those who are low on cash or skeptical of the product should have the option of signing up for a subscription and paying only a fraction up front but a premium over the long run.
A business that can get customers to pay up front for future services rendered has effectively garnered itself zero percent financing for operations. Talk about positive cash flow. You have money flowing in for services that you haven’t even rendered yet. That’s money that you can use to hire more people or invest in new capital assets. No bank required and no interest paid.
Another reason that upfront pricing is more desirable for the seller than subscription pricing, is that subscriptions shift the balance of power to the customer away from the seller. There are some situations where a corporate customer is willing to forego an upfront pricing discount and pay the monthly subscription premium. If the customer feels that there is any doubt regarding future product quality or the seller’s viability he wants to hold the power of the purse. If the buyer withholds payment from the seller, the onus is on the seller to make things right. If the buyer had paid upfront, the onus is then on the buyer to prove his case in order to receive a refund or replacement. At the very least, the buyer can cancel his subscription and cut his losses.
So with all the advantages of upfront pricing for the seller why would anyone look to pursue switching their customer base over to a subscription model? Only one reason really. Increased sales. Absent a significant revenue increase, I can’t think of a single reason why any business would prefer to receive several small payments versus one big one. But there is always going to be a segment of your target market that may not be able to afford the full price of your product. If you can offer a pricing model that pulls in a whole new group of buyers that would be a strong incentive.
If the root problem for developers is that the market won’t pay for software then the introduction of subscription pricing probably won’t change the current state of affairs. That’s because customers instinctively know that you actually pay more for a product when you split it up into many payments. If they’ve already balked at the the lower upfront price, I don’t think they’re going to jump at a higher priced subscription model.
Or if the upfront prices have been too low and customers have been conditioned to think that nothing should cost more than five dollars, nothing will change until developers stop working for free. Just like in manufacturing, nothing will change with software pricing until the weaker parties give up and leave in search of greener pastures. The remaining developers will be able to raise their prices and hold their market.
My feelings on this subject haven’t changed. I still think that both options need to be on the table. Those customers with money in hand should have the option of paying the upfront discounted price. These customers should be rewarded for their trust in the seller and handing over cash which can be used in financing the business. Those who are low on cash or skeptical of the product should have the option of signing up for a subscription and paying only a fraction up front but a premium over the long run.
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