Advantages and Disadvantages of Subscription Pricing

Earlier this month Sage announced that it would be giving the option of subscriptions pricing to customers running its Enterprise Resource Planning (ERP) systems on premise.

As Chris Kanaracus points out, this is not meant to replace traditional licenses (which are still available). It is simply an extension of the pricing plan used on SaaS that is becoming more prominent and a popular subject of conversations in the industry.

The Problem that Subscription Pricing is Trying to Solve

Subscription pricing is trying to solve the problem customers have in spending large amounts of money upfront for enterprise software solutions. Instead, it offers customers access to enterprise software for a much lower monthly fee. It also makes available the option to scale up in applications, add or reduce users, or discontinue services all together while receiving Sage’s highest-level Gold support. The message here is that customers will save upfront and not be stuck to the enterprise software solution they choose. But is it really an offering that will save the client money?

Advantages of Subscription Pricing

Beyond making product offerings more accessible to customers, subscription pricing has a lot of advantages:

Flexibility: This is twofold as a customer is able to discontinue the service completely with no initial investment loss and can also add or remove users as the company grows.

Turns Fixed Cost to Variable Cost: Not only does this give customers the pre-mentioned flexibility, but it allows them to spread out costs through the long run.

No upfront payments: It makes enterprise software accessible to smaller or growing companies, or simply ones that have smaller capital budgets to work with.

Better Service From Provider: As the provider no longer collects payment upfront, it becomes crucial that the customer stays with the provider for a certain amount of time. This could lead to better service as providers have a lot to lose if clients discontinue too quickly. On the other hand, if the customer is happy with the solution, when their business grows, they are likely to add more users and expand capabilities of the software, bringing more profits to the provider.

Simplified Pricing: Enterprise software pricing can sometimes seem complicated and depend on too many factors, whereas subscription pricing solves that by organizing price in terms of only scalability and users.

Disadvantages of Subscription Pricing

The most in-your-face disadvantage of subscription pricing is that pretty soon the total cost of the software in this payment plan becomes larger than that of licensing fees. While there are still variable costs when you purchase (aka license) the software, such as maintenance and support, those are lower than the monthly payment for subscriptions to enterprise software. The higher cost of subscription prices does away with the flexibility value of subscriptions, as the client always has the option to stop service or add new users, even if not simply stated in the licensing plan.

Higher Total Cost: As covered above, total costs for subscription pricing will soon be higher than total costs for the traditional licensing fee (purchasing) arrangement.

Not realistic to nature of enterprise software purchases: The process of discontinuing or changing solutions is complex and the most likely scenario of a customer discontinuing the subscription would be if the company ceased to exist. If that does happen, knock on wood, the only relevant question becomes how long before it does? Total cost analysis applies again.  Also, does a business really want to make plans based on that scenario? Since that’s actually rarely in the plans, then shouldn’t a business be planning ahead?

Giving customer power they already have: The idea that customers need to be given permission to disable a service is not entirely true. The choice belongs to the customer, and they can choose when to get their service no matter how they pay.
Price is part of marketing, and it may be that marketing subscription pricing will be easier to attract reluctant customers, but not necessarily better for them. The true price sensitive customer will quickly see that the cost rises steeply over time with the subscription model. It becomes a question of the value the customer sees in making payments upfront or at regular intervals. Another interesting factor of the perception of price is raised here, and it’s the idea that subscription pricing will affect the operating expenses budget, while licensing fee pricing comes out of the Capital Expenses budget, which explains the skewed perception customers might have of the advantages and disadvantages of the pricing models.

In essence, subscription pricing is a way to attract a new and different type of customer that would want immediate access without having funds for a full license fee.  What’s interesting about the current discussion on the issue though, beyond the pros & cons for resellers and providers, is that the customer is seemingly, and rightfully so, at the center of it. With that in mind, why not offer something that really benefits the customer? Some type of value based pricing model with embedded scalability, something of a hybrid system. What do you think?