Apple (AAPL) made a great move recently when they changed their App Store to allow for app developers to offer their products at a subscription price if they choose too. There are some products that lend themselves perfectly to a subscription. But most software products do not fall into this category.

I’m coming at this issue from a different angle than most people because I see it from the business viewpoint. Yeah, everyone knows that consumers hate subscriptions but why do businesses hate subscriptions? I can see the appeal that app developers would have for the subscription pricing model but for a couple of reasons it’s a bad idea.

Service and Support Is Not an Ongoing Product

For the most part, most products that you buy have a warranty period where it’s covered by the manufacturer if it stops working or is defective. Sometimes, like with BMW, this may even include regular maintenance. Do these companies make you pay a monthly subscription fee? Never. Your car payment is monthly but the purchase was an up front one-time purchase. Even any extended warranty is a one-time purchase up front.

Technically even leases are not a subscription. You’re negotiating with a dealer how much those three years are worth and you only finance it monthly.

A business will always account for service and support in the price of their product. It falls below gross margin on the income statement in selling costs. If you think you’re going to service a product for three years then you tally up what that is going to cost you and you divide it by the number of units you think you’ll sell. I’ve written about it before so I won’t go into too much detail again.

But unless you’re paying for something new, like new magazines or shirts in the mail, it’s hard for the customer to consider software a subscription service. The software equivalent of a magazine subscription would be something like getting a new game every month. Or maybe something like Netflix where you pay monthly but have access to a smorgasboard of programs. But as far as software customers are concerned, 1Password is the same product in a month or two. If they want to upgrade to a new version later on, they’re ok with that. So why the subscription?

The only scenario where it seems to make sense to offer a subscription is when your product costs significantly more than the median price of software. Adobe’s media editing software is the prime example. Paying every month for what seems like essentially the same product seems wrong. Service and support is included with almost everything else we buy but not for software? Why not?

Businesses Want to Lock in the Full Sale

Every company wants to make a product and exchange it for a certain price. Once. They don’t want to give you their product in exchange for 24 monthly payments where you can stop paying at any time. Every payment could potentially trigger your customer to reevaluate what your product is worth to them. It’s like you’re asking them to re-purchase your product every month. You only want your customer to make that decision once, not 24 or 36 times. Because there’s always the chance that after they’re tired of it they may decide to stop paying.

Also, a business doesn’t want to wait two or three years to realize the full revenue stream from sale of their product. You want that revenue immediately so that you can fund your new product stream. In theory, you launch a new product and the up front revenue funds your service and support and R&D on your next product. If your product doesn’t do this, you either priced it too low or made a bad decision on entering this market.

Whether you’re talking about a vacuum cleaner or a software application it doesn’t make a difference. You’ve already sunk all your time and effort into the finished product. If you sell up front, you get reimbursed. If you offer a subscription and your customer cancels, you lost out.

Customers Don’t Like Subscriptions and Never Will

Not only do customers not like feeling like they’re being nickel-and-dimed, but even more so, they don’t like entering into long term commitments. Yes, you may pick up some customers low on cash who wouldn’t be able to afford your product without breaking up the price. However, you’ll never know how many customers skipped your product because they simply don’t like entering into long term agreements.

Long-term agreements, even the kind you can cancel at any time, cross the threshold for most people where they start to think more rationally and ask more questions. It’s going to be harder to make the sale. I’m speaking in general here but all savvy customers avoid leases or subscriptions if there is an option to buy. Why? Because they all know that inherently you pay more in the long run.

It’s much easier to get customers to make impulse decisions for single purchase items then it is to get them to sign a multi-year deal. If they paid up front for your product and later get bored with it, too bad for them, you get to keep the money. But if they cancel their subscription? Too bad for you, you lose out on all the revenue you would have had otherwise.

So What Should App Store Developers Do?

It may be too late to ever get back to this scenario but I’d like to see apps priced with service and support built into the up front price. I just want to buy an app like 1Password one time and not see it on my bank statement every month. Developers need to be up front with their service period just like any other business and state clearly that they will service your product for X number of years or months.

If developers are determined to offer subscriptions, fine. Offer both. Why does it have to be all one way or the other? The trick is to maximize the number of people who buy up front and aim the subscription at those who wouldn’t buy from you otherwise.

A good pricing model does two things. It prices the “buy it now” price low enough to hit the sweet spot where you will catch the majority of people who want to buy your product and still offer you a good margin. Second, it makes the lease or subscription price high enough that you don’t lose any of up front buyers but it still captures people who can’t afford to purchase all at once. You don’t want to maximize subscribers at the expense of your customers willing to pay up front. Subscribers need to be incremental sales.

Now I know that this is all easier said than done when it comes to Apple’s App Store where there is a flood of cheap apps. But subscriptions won’t be the panacea that everyone thinks. They will bring their own problems too. And when subscription sellers find that out, they’ll be right back to square one.

perezonomics.com

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