In some sense, every business dreams of wanting to be a recurring revenue business.
- Gyms want you to pay monthly, and discount annual plans (and sometimes discount again if you try to cancel your annual plan)
- Restaurants want you to come frequently, 6th time is a free sandwich or coffee
- Bars want you to come to happy hour, at the same time, every day
- Content creators often have a daily, weekly, biweekly, or monthly cadence
SaaS is all about recurring revenue. In theory, SaaS aligns incentives because you can quit once the product or service deviates from your expectations or no longer serves your needs. Of course, in practice, SaaS companies want to keep the monthly / annual drip coming and may make it hard to export your data or switch providers. Local first software could be one antidote to this (https://www.inkandswitch.com/local-first/) and perhaps there are others.
SaaS is similar to old-school tech VC investing because the marginal cost is low but the upfront cost is somewhat high / fixed. A lot of investment houses think in terms of recurring revenue as well (e.g. your mortgage is a monthly payment). So if you want external funding, show a premise of recurring revenue!
You are correct, but I also hate that "recurring revenue" is the right answer.
Not only does a subscription fee act as a constant resource drain (as opposed to a one-time charge) but it further pushes society into the zone of "you won't own anything and like it".
Human life and the ability to interact with others and our environment should not be reserved to those that can sustain a high velocity of money.
Focusing on a consistent cash flow makes financial management easy but makes everything else suck. It optimizes for the wrong metric.
UPDATE: You can also look at subscription fees as a tax on productivity. If I pay once for Adobe software I can amortize that over the entire time I use it, and eventually the monthly cost will reach nearly zero. With a subscription fee I can never amortize the software, meaning the fee is effectively a tax. And if I stop paying the fee I completely lose my ability to use the product.
On the other hand, you can regard one-time fees as subscriptions in disguise, because hardly any useful software can be used forever. File formats change, collaboration changes, operating systems change.
Yeah you could run your bought-once MS-DOS accounting software in a VM forever, but most useful software has a clear expiration date, especially if you try to collaborate on data.
Subscriptions are almost definitely more profitable.
E.g. Photoshop is now $240/year. The last price I could find for a version you could actually buy was $500. Assuming someone uses it for 4 years (which might be short, the few people I know who use PS latch onto a version for forever), it would be ~$1,000 for a license.
A lot of stuff would be fine for about a decade. That would be ~$2,500 for comparable income.
Subscriptions tend to be dramatically more expensive than buying software was. $5/month over a decade is $600. A lot of stuff wants to charge $5/month for something I wouldn't pay $600 to own for a decade.
Even knowing that, I much prefer software I buy and own forever. I have too many subscriptions already and I feel icky knowing there’s all these leeches draining money automatically from my bank account every month, with not enough visibility.
A few weeks ago I was looking at iPad apps to help me learn piano. They all want a $15/month subscription or something, and I hate it. I know what I’m like - I’ll subscribe then forget and end up spending $100 for an app I use twice. I ended up getting an in person music teacher instead. It’s more expensive, but it feels better spending the money like that.
Software I buy then own (or even, pay for once a year for updates like Jetbrains) feels better because each renewal feels like an active, conscious choice.
I have a file manager for my phone. (File commander) They have a pro version that I would gladly pay for but the only way to get it is as a monthly subscription. So I just don't buy it.
Why would a file manager that runs locally and doesn't require tons of flashy features have a monthly subscription?
It's so stupid. I prefer the Jetbrains model of pay subscription or license, but subscriptions become cheaper as you had more time subscribed (IIRC, 30% discount on 3rd year)
Every business is moving to SaaS because they make more money off of the customers that way. So you can't really spin it as being better for the customer. It's better for the investors in those businesses, and worse for the customers.
I understand this perspective and sometimes I want to agree with it, but it requires some kind of competition/innovation/refinement process to exist. One time purchases means the provider needs to entice you to upgrade one way or the other - compatibility with new formats and paradigms, better X, something. Subscriptions don't have that incentive once they're relatively entrenched as de facto standards. Granted, one time purchases also suffer from hubris at that stage (see unnecessary UX changes to Photoshop, Windows, etc.) but it's more obvious with SaaS due to the sunk cost fallacy.
I actually don't mind subscriptions if they are structured correctly. If I had the choice of buying a software package that I could expect to be useful for 5 years (even good software becomes out-of-date over time) for $100 or paying a $20 yearly subscription; I would rather have the subscription.
The problem is that most vendors want you to pay about half of what a package would normally cost for a perpetual license on a yearly basis. Anything over 2 years becomes more expensive.
I do not like the incentives it place on the supplier. With a software package, they are required to compete not only with other companies, but also themselves from years ago. If they do not make worthwhile improvements, users will not upgrade.
It also puts the burden on the user to remember to cancel things. If I stop using my bike, it just sits in my garage. If I stop using the gym, I keep paying for it until I jump through their hoops and cancel my membership.
You would think lump sum is better. Monetizing sooner means you can put that money into other investments sooner that will generate greater return for you overall than having it dripped out to you at a fixed schedule.
No, because the lump sum can't be depended upon, it's unpredictable. Will you have 50 buyers this month or none at all because it's holiday season? Or maybe you'll saturate your market niche. You can't plan anything ahead.
You can say the same for whether or not you will net a subscriber next month or have cancellations. What I'm saying is that if your license is priced correctly, that revenue the consumer pays up front can go into a fund that exists to perpetually support this software indpendent of having to maintain an appeased subscriber base in perpetuity. It's this idea of having a growing pile of money that exist because of what already happened, versus having constant revenue that must continue to be depended upon indefinitely.
You don't need to get them to buy every period if they paid a lump sum up front. That's the whole point. Money is capable of growing for you, so take advantage of that fact in your business model and unshackle yourself from subscriber dependency.
In the perfect world where every monthly subscriber would be willing to pay 20-100 times (or more) the amount for a one-time, up-front purchase, sure. But that's not reality.
I mean, that's how software used to be? Let's exclude anything cloud-based and assume no marginal operating cost of running purchased software.
Adobe Photoshop cost around $1000 in the 90s, and now it's like $25 a month? Back then you paid a discount to upgrade to latest version, and now it's generally included in the subscription. For professionals, the amortized subscription price is probably the same as the flat one-time free plus the upgrades, if not cheaper.
Some of the really expensive software I paid for in 90s and early 00s still has a flat one-time fee, such as Visual Studio or Final Cut Pro. Adobe and Autodesk have moved to subscriptions, but if anything that has made them more accessible to hobbyists. They were both charging ludicrous sums back then so the normies resorted to warez downloads.
> In some sense, every business dreams of wanting to be a recurring revenue business.
As do individuals. The only thing preventing it before was the expense in enforcing licensing terms. Today’s software and cloud hosting makes that much more trivial.
In some sense, every business dreams of wanting to be a recurring revenue business.
- Gyms want you to pay monthly, and discount annual plans (and sometimes discount again if you try to cancel your annual plan)
- Restaurants want you to come frequently, 6th time is a free sandwich or coffee
- Bars want you to come to happy hour, at the same time, every day
- Content creators often have a daily, weekly, biweekly, or monthly cadence
SaaS is all about recurring revenue. In theory, SaaS aligns incentives because you can quit once the product or service deviates from your expectations or no longer serves your needs. Of course, in practice, SaaS companies want to keep the monthly / annual drip coming and may make it hard to export your data or switch providers. Local first software could be one antidote to this (https://www.inkandswitch.com/local-first/) and perhaps there are others.
2. SaaS loosely resembles old-school semiconductor VC investing
SaaS is similar to old-school tech VC investing because the marginal cost is low but the upfront cost is somewhat high / fixed. A lot of investment houses think in terms of recurring revenue as well (e.g. your mortgage is a monthly payment). So if you want external funding, show a premise of recurring revenue!