One-Time Purchase vs. Subscription Business Model

One of the most common discussions in software companies, or more generically, any company offering tech products, is the business model to choose. Over the last decade, a strong push towards subscription and SaaS models happened, very much driven by the growth potential of high, recurring revenues which ultimately also boosts a company’s valuation. Although customers often dislike subscriptions, they mostly accept or even expect subscriptions these days, if not only due to the lack of alternatives.

So let’s look at how we dealt with that topic at froglogic.

When we started froglogic, the dominant business model in the B2B space was to sell perpetual software licenses, i.e. one time purchases which gave customers a life long right to use what they bought. Therefor, initially we never really thought about a different model. While one time purchases are nice from an immediate revenue perspective, it makes future planning and revenue growth harder. Effectively, every year you start a zero, then try to match the previous year’s revenue and go beyond that. But for that you need to find new customers all the time, or grow existing accounts.

A typical component which was is in addition to the one time licenses are annual support and maintenance services. This is typical an optional component, and there is no need to renew that service to continue using the product.

Many companies in the enterprise software market didn’t pay too much attention to that component and sold those services at a rather low rate (15% – 20% of the license price) and didn’t really provide great customer service. This led to customers often not renewing.

At froglogic, we took a different approach. First of all, we didn’t only include maintenance in the annual service (which typically meant to receive minor updates to the software, but required you to do full re-purchase for new major releases). Instead we included all updates. The thinking behind that was, that we rather have all customers use the latest verion(s) of our products, so we wouldn’t need to provide support for older version. By making the service more valuable we could also charge more. So we charged 50% of the license price for the annual support & updates service (or 33% of the total, first year price where you payed the license price + 1 year support and updates).

To make this a real deal for our customers, we ingrained into our company culture to provice the best possible customer support we could. Already starting during the evaluation period, we really got out of our way to support our prospects. This exceptional service was highly appreciated and allowed us to charge much higher rates for the support & updates service compared to what was considered industry standard.

Certianly, for some customers we invested too much to help them, but on the other hand, many customers rarely needed support. So overall, this payed off big time. Over the years, on average, 90% of our customers renewed their annual subscriptions every year. Only in very rare cases, customers challenged the our prices. And finally, these efforts led to many happy customers who recommended our products and services.

What we managed was to build a one time purchase business model which led to high and plannable recurring revenues. In the last yeas before our exit, ca. 50% of the revenue came from support & updates services, i.e. was recurring.

In some way we combined the advantages of both models: Customers got the right to use what they bought forever without having to pay an annual fee. Also the initial revenue was higher compared to a pure subscription model (3x as high). Finally, since the perceived value of our annual service offering was very high, in practice, nearly all customers payed the annual fees as long as they used our products, leading to high recurring revenues.

This model worked very well for many, many years. But we noticed that besides a proven track record, potential buyers of the company were sceptical about it. Investors and buyers want companies to generate most, if not all, revenue from subscriptions. The valuation for SaaS companies are typically much higher.

In many cases, subscription models make total sense and look natural. Esp. if the operation of the products costs actual money, such as running and maintaining a cloud infrastructure. But there are cases where a subscription model doesn’t feel natural and seems to only serve the purpose to generate recurring revenues. In such cases, in my opinion, a hybrid model, such as we had at froglogic, might be more suitable and beneficial for the company and customers and can provide similar advantages as a pure subscription model.

After we sold froglogic, the first big change which was implemented was to move to a pure subscription model for our products. At the same time prices were increased. For customers this meant to pay more and get less (no perpetual rights anymore) which made the move not a very smooth ride leading to many unpeasent discussions. In the end it worked out well, but only because we took the criticism seriously and implemented special migration paths for existing customers.

So for companies who want to move from one time purchase models to subscription sales, I can only recommend to put a lot of thought into that process and focus on the customers and their benefits to make this a success. While subscription models feel like easy and constant revenue, we must not forget that in the end the customers pay for it and they need to have the feeling that it makes sense and is worth the money.