Subscription Pricing

Saeed at On Product Management has a post cautioning against half measures when moving to subscription pricing.

There is a real tendency if you already have an on premise solution to…ensure you don’t cannibalize the revenue coming in from that solution…always [putting] the existing product ahead of the subscription based product. This is what happened with Siebel on Demand. The existing business had to be protected from encroachment or cannibalization by the on demand business and it hampered the on demand business significantly. Your company will really need to shift it’s thinking to manage this well.

Macromedia published a survey in November [free registration required] that predicts a growing number of software vendors could benefit from this advice. According to the study, roughly half of all software vendors will offer some form of subscription pricing by 2009. Oddly, only 7% of these are doing so in response to customer demand. The most popular answer, 29%, wanted to move towards subscription pricing for a more predictable revenue stream. This is not the type of rationale that will lead to a successful customer adoption.

More encouraging, 21% are using subscription pricing to increase the adoption of their software. Saeed rightly suggests that product managers evaluating subscription models need to look at the overall value proposition and that pricing is simply a tool in delivering on thatproposition . If these vendors are using subscription pricing as part of a different go-to-market strategy or targeting different customer segments, they are much more likely to succeed than the ones who simply want to smooth out their revenue.

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