In 2011, Marc Andreessen, technology pioneer and currently General Partner at Andreessen Horowitz, declared that “software is eating the world.” What was true then is now even more so with the incredible growth of the subscription model. Indeed, Emir Alaguizy—Zynga CTO, Y Combinator alum and founder and CEO of Cratejoy—did Andreessen one better, stating last December that, “the subscription-based business model has so thoroughly eaten software that it’s ludicrous to sell software in any other way now."
There are clearly a number of very compelling, strategic reasons to go to a subscription model, among them more predictable recurring revenue streams and higher MRR, better ROI on customer acquisition efforts, improved customer experience, and easier management of inventory. Moreover, the data shows that making the transition to a subscription model can (and likely will!) in the longer term result in greater Customer Lifetime Value and a higher overall company valuation--in fact, over twice that of licensed software companies with similar revenue, according to Software Equity Group.
Moving to the Cloud, with Creative Cloud
Adobe provides an excellent example of a company which, having built its business on a perpetual licensing model, shifted almost completely to a subscription model for their popular document management and creative suites. While the shift was a major one for the business and for its customers when it occurred in 2013, the company still believes it was necessary for their long-term future.
One significant advantage of a subscription model is in terms of product updates. Under a perpetual license model, product updates have to be carefully planned and occur on a strict timeline, with all apps in the suite having to maintain the same update cadence. The product lifecycle at Adobe was approximately 18 months—a long time for customers to have to wait for new features and product updates. It also meant that Adobe couldn’t stay on the “cutting edge” in terms of supporting new web standards and technologies—not a good way to remain competitive in a fast-paced, constantly innovating industry.
Another upside of going subscription is in terms of reduced piracy. The much lower monthly subscription cost reduces the likelihood of would-be customers pirating the software because they are unable or unwilling to pay a large upfront cost for the software. Making a product more affordable and accessible for more people just makes sense. Also the fact that the software, which runs like an app, has to talk to the server whenever it’s being used makes it harder for users to access it without paying for it.
The Numbers Tell the True Story
The biggest benefit though may be in terms of subscribers and revenue. Subscriptions are typically pay-as-you go, which results in many more people being able to afford the product. Businesses have the flexibility to add and remove users easily as their needs change. And Adobe gets a more predictable revenue stream.
The numbers bear this out. Twelve months after launching, the company saw significant increases in both revenue and subscribers. And the numbers kept improving. Thirty months after the switch, subscription revenues have outpaced license revenue by one-third—or $500 million higher. Adobe has been able to maintain a relatively high average revenue per user (ARPU) of $451 per year (or $37 per month) as of January 2015. And in their September 17th earnings call, they reported that, “Net new Creative Cloud subscriptions grew by a record 684,000 during Q3, and we exited the quarter with over 5.3 million subscriptions.”
Innovating for Our Changing Times
As Adobe and many other have proven, the subscription model offers genuine benefits. According to Adobe’s CEO, Shantanu Narayen, who instituted the change, “There's no doubt in our mind, and my mind, that it is the right way to innovate for a broad community.” He also said, “if your business strategy is to preserve the status quo, it’s not a very compelling strategy.” He clearly understands that business environments and models are changing, along with consumer behavior and expectations. Fortunately, he demonstrated the foresight and the ability to ensure that his company is changing with them.