More and more startups and established businesses are switching their software products to a subscription model. From a business standpoint this is a good thing — it’s lucrative, infinitely scalable and all-round more profitable than a single purchase. But it might kill your business in a few years. Let me tell you why.
As mentioned, subscription models are very profitable. But as a business owner and a human, you have to balance your own benefits and those of the bigger whole.
The biggest problem with subscription models is the lack of economic rights.
It’s hard to feel like you’ve been taken advantage of when you make a one-time purchase. I can’t stress how important the feeling of lost opportunity cost is to a customer’s psyche. When you purchase a product, you feel like you’re getting your money’s worth. With a subscription, you feel like you’re trapped.
To make things worse, the subscription model is being pushed within the consumer space with a very subtle bait-and-switch.
Let’s take a look at the differences between “subscriptions” and “steady payments”. The first scenario is you being a consumer. The second scenario is you being a business owner. The two are very similar, and this is where things get tricky. What’s the difference?
The difference is perceived value.
As a consumer, you perceive value in a product. As a business owner, you perceive value in the cash coming in. The subscription model is very profitable, but it’s also very risky. As a business owner, you’re not getting the same value out of your product as you would with a simple one-time purchase.
Furthermore, as a consumer, you’re not getting the same value out of your money. In a subscription model, you’re paying for convenience. In a one-time purchase model, you’re paying for an experience. Take a look at the table below to see the differences:
In a subscription model, you may be paying for convenience, but you’re not getting the same value in return. There’s a reason why Netflix and Spotify are free for a month. It’s the same reason why your bank account has a free checking account. If you can’t feel the value, you won’t continue paying for it.
What makes a good product is the ability to create value for people.
You might have a good product, but if it’s hard to use, or hard to understand, you’re going to lose customers. People don’t want to feel like they’re wasting money, so they’ll stop spending it.
A good product creates value for its users.
Subscription based models are great for businesses, but they’re terrible for customers.
So what can you do as a business owner to enhance your product?
Take a look at the following points. I’ve used these techniques to build up my personal brand over the past few years.
You need to ask yourself: what value do I create for others? If you want to make money as a business owner, and you want to succeed, you need to create value for other people. If you can’t do that, you’re going to have a hard time making money.
Most people don’t understand the business mindset. They think that businesses are out to get them, scam them, take their money and run away. The truth is that while there are plenty of bad businesses out there, there are also plenty of good businesses.
Very few businesses are out to steal your money. Businesses want to make money, and they want to make it legally. If you can’t create value for others, you’re going to have a hard time staying in business.
And the best part about creating value for others? The more value you create, the more money you make.This is why subscription models are so profitable for businesses. They create value in the form of convenience for their customers. But creating value for others is more than just “convenience”. You need to create value in the form of an experience.
A purchase based model is (in a sense) a transaction. You provide a product, and the customer receives an exchange of money for said product. A subscription based model is a “relationship”. You provide a service, and the customer receives a subscription to said service. A good product creates an experience. A great product creates an experience that people want to pay for.
It’s hard to put a price on experience. Some people would pay $5,000 for a two-hour experience. I’ve seen people pay $50,000 for an experience. A product can be one-time purchased, or it can be a subscription. But a product can’t be both. If you want to make money with a product, you’re going to need to create an experience.
A service is intangible. It’s not something you can hold in your hand, or something you can place on a shelf. But that doesn’t mean that it’s not valuable. A service is valuable because it’s hard to create. A service is hard to create, and it’s hard to replicate. If you want to make money with a product, you need to create a service. It’s a simple concept, but it’s not something most people can do. You need to create a product, create an experience for people, and create value in the form of a service.
If you want to make money, you need to set a price that reflects your value. You can’t create value for others, and then ask for millions of dollars in return. You can’t create value for others, and then ask for $1 in return. You need to set a price that reflects your value. If you’re providing a service, you need to create a price that reflects the value of the service. If you’re providing an experience, you need to create a price that reflects the value of the experience. You need to price your product based on value — not convenience.
This is where the subscription model loses its value.
The subscription model makes businesses more money. That’s a fact. But if you want to make a business that makes money, and that lasts, you might want to consider using a one-time purchase model instead.
The subscription model makes more money for businesses. But it’s not the best model for customers. If you want to make a business that lasts, you need to create value in the form of an experience, and set a price based on that value. You need to use a model that creates value for your customers. You can’t ask them to pay for something they can’t see, don’t understand and don’t want.
It’s hard to create value for others, but it’s not impossible. If you can do that, you’re well on your way to creating a business that lasts.[work in progress]