Top 5 obstacles to adopting subscription pricing

Is 2009 going to be the "Year of Subscription Pricing" -- finally? Didn't the antivirus software companies prove the undeniable benefits of subscription-based pricing and reoccurring revenue streams years ago? I know the antivirus companies' success was a big factor in giving subscription pricing a try when I was part of introducing security products over the last few years. (See this blog post by Alan Shimel where he talks about these experiences. Eric Lai also has a good article in ComputerWorld.) But for those vendors who have tried this model, repeating the results of the antivirus vendors has been problematic, to say the least. There are a few success stories -- Salesforce.com, hosting services and online MMORPG games -- but very few traditional software vendors were able to make subscription pricing work without also moving to a software-as-a-service (SaaS) hosting model. The move to SaaS software applications and Microsoft's own Online Services offerings are signs the industry is very much a believer in the subscription pricing model, now very much a part of a SaaS model. The question is, are customers?

There are still obstacles vendors face when they try to sell software, hosted or not, using a subscription model. Here are my Top 5 lessons learned, based on my own experiences.

1. Go with the flow. Companies are very accustomed to the perpetual software-licensing model. It's second nature for IT managers to submit a request to buy software at X amount and pay around 20% for annual maintenance fees. Purchasing and Accounts Payable already know how to process those purchase requests, but throw a subscription-pricing model into the mix, and often the works seem to get gummed up quickly.
2. Justification -- again. Once the upfront justification has been made and that big invoice paid for perpetually licensed software, subsequent maintenance invoices usually sail through the system. Subscription-priced software is often subject to re-evaluation and justification each time the invoice is up for payment. Even though the cost of a monthly or annual software service fee is less than the cost of a large upfront purchase, times and priorities change, leaving subscription software up for reconsideration at any time.
3. Who "owns" the software? Does the vendor own the software and is the user just leasing it? Even though the details of a perpetual software license agreement can vary widely, most buyers feel they "own" the software when they pay that large sum upfront.
4. New kind of license agreement.  Buyers are usually pretty comfortable with the structure and stipulations of most perpetual software agreements. Subscription software introduces new, sometimes more variables that the enterprise may not be as comfortable dealing with. Add a hosted application service to the mix with a subscription licensing setup, and you could be in for a lot of phone calls to review contracts, licenses and service agreements.
5. Capital or software expense? Believe it or not, this decision about how the money spent will be accounted for on the books is a really big consideration. Monies may have been set aside specifically for software capital purchases. Is the money for a software subscription locked up in a capital budget? And there are many great financial benefits to amortizing a big software purchase.

Clearly Microsoft and many of the other vendors making the shift to SaaS online apps believe these obstacles can and will be overcome. On the surface, they don't appear to be big barriers to this happening. But habits can be very hard to break. Microsoft's getting into the online services market is actually a big plus for helping this transition happen, helping legitimize the subscription model and moving IT managers and purchasing departments to this approach.

2009 might not be "the" year of subscription pricing in terms of overtaking the revenues generated through traditional software sales, but it may very well be the tipping point for legitimizing this method of purchasing software. 

Like this? Here are some of Mitchell's recent posts.

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