At 37signals we sell our web-based products using the monthly subscription model. We also give people a 30-day free trial up front before we bill them for their first month.
We think this model works best all the time, but we believe it works especially well in tough times. When times get tough people obviousy look to spend less, but understanding how they spend less has a lot to do with which business models work better than others.
There are lots of business models for software. Here are a few of the most popular:
- Freeware, ad supported
- One-off pay up front, get upgrades free
- One-off pay up front, pay for upgrades
- Subscription (recurring annual)
- Subscription (recurring monthly)
Cutting new before cutting old
Typically people look to cut new spending before they cut current spending. They’ll often put a freeze on anything they aren’t already paying for. Eliminating new costs is easier than eliminating existing costs.
For example, if they’ve been evaluating something new, they’ll put that evaluation on hold. If they’ve been able to get by without it they can likely continue to get by without it. Or if there’s a big upgrading coming up they’ll stall or just consider it unnecessary.
But if they’re already paying for a service they use, they’ll likely continue using that service. They may downgrade to a cheaper plan, or try to negotiate price, but if it’s still useful there’s a fair chance they’ll continue using it.
The problem with one-off selling
The problem with one-off selling is that once the customer pays you once, that revenue stream runs dry. In tough times, when people freeze new spending, less new customers means less new revenue. And in extreme cases, you may see no new customers at all. That means no new revenue at all. So if you have no new customers for three months, you have no new revenue for three months. If you don’t have reserves, going dry for three months could sink you.
The semi-benefit of annual subcriptions
Annual subscriptions are better because you still have the potential to generate revenue on a regular basis without picking up new customers. However, since annual renewals are initially more expensive than month-to-month renewals, companies may think twice about re-upping. If they do re-up, they’ll likely negotiate harder and threaten to leave all together if their price isn’t met. They may be bluffing, but in tough times it’s especially hard to risk losing a customer.
The benefit of monthly subscriptions
Since new spending is often cut before current spending, you may not see any new customers for a while, but with a monthly subscription business model you’ll still be earning regular monthly income from your existing customers.
If you have 5000 paying customers at $10/month, you’re sill seeing $50,000/month in revenue even though no new customers are signing up. And while some existing customers may start to cancel to save on their current costs, you will still have money coming in every month. Cash flows from monthly subscriptions are among the most predictable flows you can find.
The other benefit of monthly subscriptions is that the entry cost is lower for new customers. An annual subscription may ultimately be cheaper than a monthly subscription, but the initial outlay on an annual subscription will scare a lot of folks away in a tough economy. People are looking to save money, and annuals can do that, but they’re thinking short term not long term. Short term savers reign in tough times which is why monthly subscriptions are safer for all involved.
How about a combo?
Some companies offer a combination of plans. Monthly, annual, or big up front “lifetime” subscriptions. As long as monthly is an option I think they’ll be alright. At 37signals we don’t have an advertised annual option, but you can make a lump sum deposit into your account once you’re signed up. This way you can put in $500 and not have to worry about seeing a credit card charge on your bill every month. Some people like this because they can spend whatever remains in their annual budget this year and get to use the product “for free” next year.
Just a reminder
The ideas above aren’t rocket surgery, but they are a reminder that the type of model you offer can have a significant effect on your company’s viability when the bad times roll.