The subscription economy continues to expand unabated. By some estimates, companies employing subscription licensing have grown between three and four times faster than the S&P 500 over the past 12 years. As CSO of Zoho, a B2B subscription-based technology company founded over a quarter century ago, I’ve noticed a growing imbalance between providers’ profits and customers’ outcomes, particularly within SaaS.
The ubiquity and massive growth of subscription licensing have created a model that appears beyond reproach. Upon closer inspection, however, software is no longer getting cheaper, broader, and deeper for customers. Recently, the likes of Meta, Netflix, Microsoft, Oracle, SAP, and Salesforce have all announced price hikes as high as 24% for specific products or services. A new round of layoffs is underway across tech as well. Somewhere along the way, the economies of scope and scale have fallen out of whack, and business customers have been stuck with the check, made out month by month, user by user.
Rather than contributing to this chasm, software providers can drive growth by passing along the inherent benefits of the cloud and subscription licensing down to the customers. This was, after all, the initial promise of the model some 20 years ago. In my experience, longevity in the market relies on boosting the productivity, agility, and bottom lines of business customers. In other words, adding value rather than restricting it will improve both the health and sustainability of the subscription economy and its merchants. Providers can approach this strategy in the following ways.
Encourage flexibility
Migrating from one tool or system to another is painstaking, costly, and disruptive. If offered at all, trial accounts are underpowered with limits on data processing, storage, usage, and timeframe. Broadening customer trials in length and scale has a twofold benefit to vendors. First, providers get insight into adding users’ effect on the company’s performance, resources, and costs, allowing companies to modify their delivery and pricing without affecting existing, paying customers.
Businesses can stand out by offering solutions through a subscription license.
The second benefit to building customer flexibility and choice into the offering is new business growth. As Harvard Business Review points out, the Financial Times ran an experiment wherein they removed the ability for customers to view three free articles on their site, instead imposing a paywall immediately. Their website traffic dropped 30% and saw a long-term decline in new subscribers. “Forcing all users to convert on their first visit would mean losing out on 79% of conversions — equivalent to tens of millions of dollars in customer lifetime value.”
This is because customers prefer to experience a product and build trust with its manufacturer before making any purchasing decisions. In the case of software, where deals can amount to millions of dollars, businesses would be happy to shop around until they find a suitable solution from a trustworthy vendor at a reasonable price; however, with the industry in its current state, they could be shopping forever.
Businesses can stand out by offering solutions through a subscription license. By leveraging subscription management tools, reducing operational costs, and broadening and deepening offerings at a consistent frequency and price, businesses can afford their customers more flexibility.
Don’t be greedy
After a long period of steady growth, efficiency, and affordability, the software industry is now battling rising costs for infrastructure, R&D, personnel, and market penetration. Despite this, subscription licensing remains a stalwart of the industry, mainly because of its financial and operational upside to providers.
The cost of entry for software customers is lower through a subscription model than a perpetual license. However, on average, the cost of ownership will flip within four or five years, meaning businesses eventually end up paying more for subscription-licensed software. Providers understand this and work overtime to lock their customers into long contracts or make migration away from their product extremely difficult.
We’ve found that letting customers cancel their subscriptions whenever they choose is mutually beneficial. It frees up resources within the organization to improve products, add new customers, and build public trust in the brand. On the customer side, the option to leave encourages them to look at their operations more closely and determine what they need and will use. Often, those customers come back and implement a different solution that better fits their size and scope. It’s relatively simple advice, but providers fare better over a more extended period by pricing their products reasonably and allowing customers to walk away.
A return to normalcy
Today, the tools and techniques available for providers to manage recurring subscription fees and develop new customers are bountiful. Progress in this area is fueling the model’s massive growth and adoption. On the other hand, subscribers have no industry-wide standard or mechanism by which customers can extract more value from their providers. In SaaS, the onus is on the vendor to drive customer success, and the way the market is arranged, there needs to be more incentive to do so, mainly when costs are on the rise for providers.
Streaming services are a prime example of this imbalance in action. Extreme competition and heightened customer expectations have moved providers to raise prices and reduce the quality and quantity of their offerings. These companies see consolidation and market capture as a better means of growth than investing in their existing product’s strength and its value to customers.
The same is true in tech, but I anticipate a course correction shortly. In a field as crowded as SaaS, differentiation wins market share. Yet, only a few vendors will leave money on the table to deliver consistent flexibility, affordability, and product innovation to their customers.