Recurring Billing vs. Upgrades

Once upon a time, software companies made a big chunk of their money on upgrades. Every year or two (or four, if you’re Microsoft), you release a new version of your product that has new features, better speed, improved functionality, etc, and a big chunk of your user base would empty their wallets to upgrade.

The great thing about upgrades is that they represent almost instant revenue. Add 1-2 features, send out an e-mail to your users, announce it on your website, have the product start “reminding” users that an upgrade is available, etc — and you could easily get more than 50% of 1.0 purchasers to buy version 2.0.

In the last few years, especially as more downloaded software moves into the realm of web apps (I now use Google Docs for my spreadsheet needs), a new paradigm has developed: software as a service. This is a radical shift, away from software/content ownership (buy the software, buy the movie, etc) to more of a “rental” concept. This obviates the notion of upgrades because as long as you are paying the subscription fee, you always have the latest version/latest content. This is not just about software — Netflix is a good example of this paradigm at work, too.

In my opinion, here’s why shifting to a recurring service model is a good idea:

  • Revenue is flattened out in a good way — it’s constant! Most companies see big revenue spikes during upgrade season. If upgrade season is a biannual event, then there can be tough economic times during the 2 years of R&D between upgrades.
  • Users are never “caught” at a bad point in the upgrade cycle. Imagine you buy version 1.0 a mere 2 months before we release version 2.0. Do I still charge you full price for 2.0? If you simply charge $10 per month, then upgrades are free and everyone is treated equitably and fairly. Rather, there’s no such thing as an upgrade because everyone has the latest “version.”
  • You can get users hooked, in a good way! It’s very hard to switch to a competitor if I have my whole life stored in your web application. That isn’t to say that you should lock people in — I admire how open Google is with Google Apps — but from a practical perspective, people won’t switch too often.
  • Support costs are lower. I remember we would have people using 10-year-old versions of our software. They wouldn’t upgrade, they wouldn’t pay for support, but they’d bombard us with questions anyway. If they would only upgrade, their problems would disappear, but that’s a tall order for some people. With a recurring service, ideally everyone is on the same version.
  • The Internet makes it easy — people can change billing options, opt-out if they don’t want to continue paying, etc. Everything can be automated, and you control billing (not your resellers). You can combine the two — when an anti-virus company sells its product in a retail store, the initial money goes to the retailer, and afterwards it goes to the anti-virus company (which rebills the customer directly).

I’ll talk more about making content/software “rebill friendly” in a future post.

–Alex Rampell