The software industry has dramatically changed and grown in recent times. The way that users access and pay for their software has gone from a one-time license fee and installation to the subscription model where they continuously access their software through a web browser.
With nothing to install and no lengthy contracts to commit to, more and more businesses are moving to the subscription model. It has many benefits both for the SaaS provider and SaaS customer and has become increasingly the preferred way to access software. This has become a competitive disadvantage if businesses do not offer a subscription model.
When major software companies like Microsoft and Adobe migrated to the subscription model, many others followed suit because there are huge numbers of SaaS products available on the market.
What is the Subscription Model?
The subscription model is a recurring revenue model whereby customers pay a regular fee for your software service on a weekly, monthly, or yearly basis. There is no upfront cost for the software, and customers can renew their subscriptions after a certain period. The focus is squarely on customer retention and reducing customer churn to ensure a steady revenue stream for the business.
The defining feature of the subscription model is that customers are not locked into perpetual contracts with your software but can continue to decide on a recurring basis whether to keep paying the subscription fee. This represents more freedom for customers who don’t have to invest in expensive software and infrastructure to keep their business running.
Top Benefits of the Subscription Model for SaaS Businesses
Less of an investment for new customers
It becomes easier to persuade new customers to try your software as there are no upfront costs. Customers aren’t committed to a hefty license fee to purchase a hard copy of your software. When customers know they are only subscribing to temporary access to your software with the option to renew, this greatly reduces the costs associated with trying out new software and makes your product more affordable for smaller customers – especially with different pricing tiers.
Enables “try before you buy” for customers
SaaS subscription models usually come with a free trial period where customers can learn whether your software is a good fit for them. With nothing to install and no fees, the barrier to entry for SaaS customers is much lower and has become an important part of marketing. When prospective customers can instantly access and learn your software, this makes it increasingly likely they will part with the cash.
Easier to get new customers set up
When customers can access your software on the subscription model, you can onboard them with interactive walkthroughs and tutorials tailored to every customer. You can get feedback on how successful a customer has been with onboarding and take action to move them through the customer journey. Customer success teams have access to data that tells them when to take action with particular customers.
Potential for higher revenue over time
When customers don’t purchase a single license but instead pay a recurring subscription fee, SaaS businesses can earn a higher lifetime value per customer who renews their subscription weekly, monthly, or annually. Of course, SaaS businesses must continue offering value to customers to justify the subscription, but generally, satisfied customers will commit to continue paying their subscription fee.
Lower customer acquisition costs
It becomes easier to offer existing customers cross-sells and upsells, representing a virtually cost-free method of earning new business. There is always the potential to increase revenue for existing customers without going through the whole sales cycle again. These happy customers can also recommend your SaaS product to others, meaning that businesses can benefit from word-of-mouth which is one of the cheapest and most effective forms of marketing.
Accurate revenue prediction
With the subscription model, companies can more accurately predict the revenue they will earn by monitoring and predicting customer churn. Since existing customers are retained through regular payments, SaaS businesses have advanced notice of how much revenue they will get, which helps with their budgeting and growth.
Better relationships with customers
When customers engage with the SaaS product on the subscription model, companies have more opportunities to interact with them and deepen customer relationships. When SaaS customer support is top-notch, this can play a significant role in helping customers decide to renew their subscriptions. SaaS businesses often have well-developed customer success teams dedicated to helping customers get more out of the software.
Avoid security risks
With the subscription model, SaaS companies continuously deploy security patches and updates over time, so every customer always works with the latest version of your software. This makes it much less likely that malicious actors can find and exploit vulnerabilities in the system since security experts can take steps to mitigate risks immediately. This makes it the responsibility of the provider, not the customer, to ensure the system’s security.
Top Benefits of the Subscription Model for SaaS Customers
Not only is the subscription model beneficial for SaaS businesses, but it also represents some significant advantages for customers as well.
Encourages continuous development and improvement
When customers continue to pay a subscription fee for their SaaS product, they expect regular updates from the software. The entire process of installing updates happens behind the scenes with SaaS software so that customers don’t need to take time out of their work schedule to install upgrades manually. SaaS companies must continually justify the customer’s subscription fee, which motivates them to follow a regular product roadmap that keeps their product ahead of the competition.
Less of an upfront investment
For small businesses, investing in new software can often seem out of reach. Not so with SaaS software on the subscription model. With the SaaS subscription model, there are no upfront costs for customers who want to try out new software for their business. By the time paying the subscription fee comes around, you might already find that the software is delivering a return on investment, bringing adopting new software much more in the realms of possibility for customers with smaller budgets.
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More affordable for smaller businesses
Subscription model SaaS companies can scale up or down with your business, adding or subtracting seats or features as your needs change. Small businesses who are not sure what their budgets are going to be during the next quarter can rest assured they are not going to be locked into paying a hefty license fee for features or seats they don’t need.
Makes it easier to move to another provider
Although not good news for the SaaS provider, subscription model customers have the option to move to another provider if they are not satisfied with the software. They can continually evaluate whether the software is a good fit for them and easily trial a new option if their needs change. They don’t have to feel like their existing software is a waste of money if they don’t keep using it because they can easily cancel their subscription.
Doesn’t require maintenance costs
When buying and installing software on-premise, customers are responsible for maintaining and updating the software. With SaaS companies on the subscription model, this maintenance occurs in the background with a team of dedicated experts which takes the burden off the customer. Without the subscription model, businesses are required to hire teams of IT personnel who are responsible for maintaining the system, which represents an extra cost.
The subscription model is highly popular in the software industry and a staple of SaaS businesses. Paying for software on a recurring basis is preferable to purchasing a copy of the software outright for the reasons presented in this article. If SaaS companies can take advantage of the subscription model, they are poised for success through recurring revenue.
Of course, subscription companies need to focus more on customer retention and expansion. Subscription models require customers to be constantly nurtured and developed if they are to continue to subscribe to your business. Each time it comes for the customer to renew is a chance for them to churn, so SaaS companies must take proactive steps to retain them.
Subscription customers paying their renewal fee to SaaS companies can benefit from a continuously updated and improved product. They know that new features will be instantly available without requiring any installations on the part of the customer.