Like all business operators and investors, I value recurring revenue. From my time as president and CFO of Shutterstock and in many other positions over the last 15 years, I have seen just how powerful a pitch-perfect subscription model can be for scaling quickly and responsibly.
However, software as a service (SaaS) has perhaps become a bit too interchangeable with subscription models. Every software company now looks to sell by subscription ASAP, but the model itself might not fit all industries or, more importantly, align with customer needs, especially early on.
New categories make for skeptical customers
In established categories, customers have preconceived ideas as to what a software product should look like and how it should work and be sold. In most cases, this aligns with subscriptions. Customers are just used to it.
Requiring commitment via subscriptions or larger agreements up front, in this environment, might actually hurt you rather than help you solidify your value proposition.
However, newer categories of software that address fresh problems to solve bring more skeptical, or at least, less experienced customers. They usually want to try a variety of solutions before they settle on the one that works for them. This means they will naturally value flexible terms more than the companies in established categories might.
Requiring commitment via subscriptions or larger agreements up front, in this environment, might actually hurt you rather than help you solidify your value proposition. Moreover, it certainly does not align with the customer’s need to identify the best solution for them by trying several.
A great example of this is the virtual events category. The COVID-19 pandemic instantly created a massive need for better virtual event software. Initially, people tried to use standard video call software for this purpose, but quickly came to the conclusion that they needed more customized solutions, since, as we all now know (and event planners knew all along), events are not meetings!
What happened? Lots of new virtual event companies and products sprang up, and with no established favorite and no clear understanding of the category, customers wanted to try out a variety of solutions. A similar series of events unfolds regularly in many other categories.
So what is a new solution provider supposed to do? Easy: Let the customer try it out with a real use case on their own terms, and then move to a subscription or bigger commitment after they have built experienced-based trust that your solution is the one for them. Who wants to have access to five events per month for a recurring price if you don’t like the first event you host?
Create a transparent buy experience
A common issue that I see with a variety of SaaS products is that they abstract the product itself from the buy experience, leading customers into a longer-term commitment with a product they don’t fully understand.
Think about Adobe, for example, which forcibly moved their customers over to a subscription model. Customer backlash was so pronounced that over 50,000 signed a petition. It was clear to them that Adobe’s pricing decision did not make sense to them. Profits soared for Adobe, but at the expense of some loyalty and customer engagement. There are now dozens of companies that compete with Adobe for control of the creative suite.
And this is the problem: Unless you already are an Adobe of the world and have a sticky product and widespread adoption, the value proposition needs to be much clearer. You risk high churn with a subscription model for a value proposition that isn’t transparent from the beginning, or if you have a product that isn’t quite there yet.
For many software products today, a good user experience (UX) is key to decreasing churn and building loyalty. But the SaaS subscription model incentivizes getting a longer-term commitment over the customer developing a deep understanding of the product’s UX, advantages and limitations from the beginning.
UX is about how the product looks, feels and works (and doesn’t work). Yes, you can get an idea of this during a demo, but you really just need to use the product yourself. That said, it can be difficult to gauge UX with a limited free or short trial, as customers might not have incorporated the product into their workflow or faced their own needs before they are forced to purchase. This means that they may not be using it as they naturally would.
What you want to do is to create a transparent buy experience. Let customers assess the product on its own merits — every shiny button and dark corner. If your sales approach makes it hard for users to make a good, informed decision, it hurts trust. Customers need to know what they are buying. This might lower initial sales, but it will dramatically decrease churn and increase upselling opportunities and referrals.
Take a hybrid approach to pricing
There are all sorts of categories that require building trust with the customer before you move to a recurring revenue model, many of which are either new or fit into the “experience” category: Virtual events, virtual classes, virtual travel, virtual shopping, etc.
If you’re in a new category, make flexibility, transparency and trust the first things customers feel when they are trying out your product or service. This involves making the early engagement with you much more interactive than merely demos so that the product is less abstracted during the trust-building process.
It also means you should consider offering one-time experiences for a fixed fee or for free, which can then be turned into a subscription offering if, and hopefully when, the customer is happy with the product and wants to use it more frequently.