Can the software subscription model work for large format/sign providers? Jurgen Verhulst, applications specialist at SAi, explores the issue.
In April this year, SAi introduced a subscription model for its signmaking software package Flexi. The ability to subscribe to powerful software programs on a monthly basis, funded from revenue rather than the capital investment required for an outright purchase, is becoming both more common and popular says SAi’s applications specialist Jurgen Verhulst. With advantages for large-format print/sign providers, software developers and dealers alike, this method of software delivery is seen by many as the future business model, but does it really make economic sense? Here Verhulst argues the point.
The model is simple: large-format print and signmaking companies can access a fully specified and up-to-date version of software solutions for about 1.25% of the full purchase price. This makes the break-even period on the ‘traditional’ buying option typically around seven years.
In reality, that timeline is probably longer, since during that period a new version of the software, with more features and better performance, will probably have been released. There is also a good chance that the customer may have bought a new computer with a new version of computer operating software.
Upgrading to a new version currently costs roughly 15% of the original cost. That additional investment would mean that the actual breakeven for those with subscriptions is more like eight years. With the subscription model, users always have the latest version, so there’s no need to upgrade. This ensures optimal performance and competitiveness, at a low price that can be paid as a revenue expense, rather than a capital investment.
For printers/signmakers, investing in new software frequently corresponds with investing in new equipment, so available cash is likely to be lower than at other times. SAi’s own research showed that 31% of our users said they preferred buying a subscription instead of a full software package. However, of those planning to buy within six months, that figure went up to 48% in favour of subscriptions, and when it came to signing the cheque, more than 50% opted for a subscription.
With the subscription model, the expectation is that the pie will grow with customers attracted by the lower price, and, of course, a sales organisation will still be working to promote the software. In the case of SAI’s own subscription model, within the first two months it attracted several hundred more large-format print/sign providers than had been projected.
The cost of sales is considerably reduced, too, and the buying becomes automated. Packaging, shipping and conventional invoicing is eliminated. Once in place, the subscription model is sustainable and scalable, with the ability to add licences immediately as required.
Software suppliers need cash to support this change and it will be interesting to see which companies are prepared to make that commitment. Perhaps smaller, privately owned software companies will be more readily able to implement the model than large public companies that might find the process and expenditure more difficult to justify. In the end, even the large companies may be forced by the market to offer subscriptions, in the way the music industry has had to move from CDs to downloading MP3s, to streaming.
Established software providers will likely have a number of customers who are using very old versions of their software. Within SAi, it is expected that the subscription model will be very attractive to them, as investing in a new traditional software package is something they’ve already demonstrated they are unwilling to do. Similarly, new large-format providers and signmakers are finding subscriptions attractive, as it is likely that they are making equipment purchases at the same time and want to control costs.
There are no weekends or holiday on the Internet; software can be downloaded 24/365. Neither is subscription income affected by traditional sales cycles and patterns, so revenue is more stable. Sales efforts can be more focused on software development and marketing and not driven by sales targets. With more reliable income, better profit and loss projections can be made and cashflow more accurately controlled and R&D and other activities more confidently funded.
It makes sense that software suppliers will be sensitive to customer diversity and continue to give them a choice between purchasing and subscribing. However, subscriptions offer software providers a steadier financial foundation while delivering a game changing business model for all parties. So expect the market to move in this direction.