The Power of Recurring Revenue for Software, Subscriptions, SaaS and Digital Content

Christina O'Toole
By Christina O'Toole

Estimated read time: 3 minutes, 35 seconds

Software providers have been moving away from one-time downloads and toward a subscription business model for the past several years. This can be a win-win for both the seller and the consumer…

SaaS Companies Are Worth More

The biggest advantages of subscription payment: more consistent cash flow combined with the ability to predict recurring revenue—whether monthly or annually.

This usually means that the company is valued higher, according to John Warrillow, creator of The Value Builder System, who states, “The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be.” He also noted, “Because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue.”

Based on a predictable recurring revenue model, subscription based companies can:

  • Calculate the lifetime value of a customer
  • Analyze the cost/benefit ratio of new customer acquisition and retention
  • Manage inventory
  • Simplify pricing models
  • Quickly respond to software “issues” with downloadable updates
  • Offer incentives for add-on purchases

Improved Customer Loyalty

Subscription based pricing allows providers to constantly improve their product and offer software upgrades to users through web-based downloads. This benefits the provider because it builds customer loyalty while saving the provider tech support time spent with unhappy customers who may be using software incompatible with current operating platforms. If the customer is on a subscription and is sent emails urging updates, it lowers the chances of using out-of-date software.

The Price is Right

Attracting customers and keeping them can be challenges in any business, subscription-based or not. Subscription can be a great “try it before you but it” way to attract buyers.

Many SaaS companies offer a free or low price option for a basic subscription package, and, if the customer wants it, adding additional features onto that package for an extra charge. Determining the correct pricing for subscriptions depends on your product and user base.

SaaS Transition

In 2012, Adobe launched the Creative Cloud, replacing its long-time flagship product, Creative Suite, with a subscription service that traded boxed software and resellers for a simple download link. Adobe’s new subscription model included Photoshop and other popular Adobe software such as Illustrator and After Effects. It was more affordable for customers with packages beginning at $10 a month, instead of the old one-time purchase cost of about $700 for just Photoshop.

Unlike Adobe’s previous model, the subscription model gave customers more frequent product updates and the ability to synchronize their workflow across multiple devices. This was a big advantage over the old system.

At the end of fiscal year 2014, Adobe reported $1.7 billion in annualized recurring revenue for Creative Cloud, a 70% increase from 2013. About two-thirds of the company’s fourth-quarter revenue was from recurring sources, up from 44% a year prior. Adobe’s share price nearly doubled over those two years.

Sure, not every business is an Adobe, but many companies can see a revenue ramp from subscription.

The Solution

Tracking subscription payments requires time, software and staffing unless the provider decides to use a third party service to handle the new functions. And it is important to note that subscription management goes beyond pricing—there are customer service issues, technical support and licensing questions. A subscription management solution, such as the one offered by FastSpring, can provide the ability to offer its customers faster access to software updates, easier set-up, and lower initial costs.

FastSpring’s platform provides an all-in-one outsourced solution for subscription management that includes powerful subscription notifications that can be customized, localization in multiple languages, and an array of payment methods supported in more than 15 currencies. FastSpring also offers a wide variety of recurring subscription cycles, reporting, prorating, free or paid first periods.

Since resolving past due accounts and expired credit cards costs both time and money, you can control set up automatic reminder notifications on your account. This improves the efficiency of your business and allows you to concentrate your resources on the areas that help you expand your business on a global scale. FastSpring’s comprehensive software ecommerce platform includes its tailored Dunning Management system that not only helps control delinquent accounts; it also offers a pro-active approach to customer interaction with pre-billing notifications and reminders that increase long-term customer loyalty.

Try FastSpring

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