Subscription vs. Innovation

The Subscription Model

Per User. Per Month. Per Year. Family Plan. Save if you sign up for a year!

These are all words we have gotten familiar with over the past 20 years. My first experience with subscription services were with Adobe products. I was truly excited. I thought, great! Now I can subscribe to a service and get quality software for a fixed low monthly cost and new features released regularly.

The subscription idea brought on a new wave of software development. Software shifted from the waterfall method to the agile method. Software truly was revolutionized, allowing companies to act quicker and nimbler than ever before.

But there’s been a dark side leaching on this model. Corporations are diluting subscriptions into what they want: cash cows. People are getting tired of paying for subscriptions for hardware they’ve purchased and can’t use without a subscription, or software that they use occasionally but have to purchase a monthly or yearly subscription to use.

Its Not All a Bed of Thorns…

Before I go into my thoughts of the current state of the subscription model, I do think there are benefits for companies having a subscription model.

1. Recurring Revenue - Having recurring revenue is important for growing companies. It allows them to scale and morph with their customers without fear of missing out because of the wrong pricing model or wrong features.

2. Consistent Updates - Both companies & customers can benefit from consistent updates. If there is a buggy update, the software can be updated. If customers want a feature fast, they can provide that feature and add a competitive edge to their app.

3. Better Valuation - Growth can show a better valuation to potential investors or partners. It allows you to have a solid estimate on how much your future growth and customer willingness to pay.

4. Flexibility - Both developer & customer has flexibility, by allowing customers to move on if they decide the product isn’t for them anymore, and for developers developing at a pace they prefer without wondering if the next feature will be a hit or not.

5. Cost - It allows customers who would have skipped purchasing a product because the initial startup cost would have been too high to see a less expensive path to license & test the product with little risk to them.

These are some of the probably dozens of benefits subscriptions have brought to the world of app development, products, and even general ownership.

The Bed of Thorns

Innovation

By going with an subscription model on items that don’t necessarily benefit from a subscription model, it allows companies to charge whatever price they deem is acceptable by the market and reduce or remove innovation to the minimum required to maintain users, and just cash in on recurring revenue without creating new and innovative features. For those companies that have created the market for the good they are selling, they can easily undercut all other competition and therefore, innovation from the market.

I think of Adobe, who created the PDF standard. They charge $13/mo. for basically the same 6-8gb PDF reader they’ve always offered with little incentive to innovate on the idea of what a PDF could be.

No doubt innovation will continue to happen with some methods of subscriptions, but I get worried when companies buy out their competitors, then raise their rates or shut the competitors down and do nothing to truly innovate on the product. Being anti-competitive just shows they are not willing to truly invest in innovative ideas.

Ownership

The biggest thing I worry about is the ownership of products. Both people and corporations base their wealth on numerous things, but one of the key things both banks and investors look at is assets. At what point is the asset no longer an asset, but a subscription that has no value to the bank or shareholder? If the building or home is rented, the phone is on a payment plan, the Xbox or Playstation games only work with a subscription, the printer is only worth something if it includes a subscription, the fridge only works with a subscription, parts of your car only work when the subscription is paid, then how are we deeming the value of the product? Is the value from the recurring revenue it creates or the one time purchase, customer care and support the company provides? If so, then when a company or individual claims bankruptcy, what assets will the bank be able to take if those same companies already own them?

If nothing is owned then there is no value to a business, person or industry but the perceived value the user has agreed to pay for a license to use those products.

Shutting Down

I get that companies need move on from products once they become unprofitable but as hardware & software become more integrated, its easy for corporations to shift their focus to new product sales instead of supporting a product they have already sold. Profit comes from new products, not previously sold products.

I think of the headlight in my car, it has control chips in the headlight assembly because it has adaptive headlights. There are no 3rd party headlights for the car, very likely because the headlights are controlled by an encrypted ECU, or has copyrighted code or technology in it. Because it doesn’t make VW money to continue to maintain parts on an almost 10 year old car, they have put the headlight on infinite “backorder”, with little incentive to fulfill the order, even after a year of waiting for the headlights. All this, while they have grown their profits to record levels and focused more on selling profitable products rather than costly parts for previously sold cars.

If a conglomerate or even a large business sees little value in continuing to produce those parts or maintain that software because they’ve diluted their product offering to capture a wider market share, they will stop selling that product even if it means inconveniencing hundreds of thousands of customers. They know customers have little choice but to follow with that goal, whether its good for the consumer or not, because there are few other options for them.

If they truly don’t care about the software, or even hardware, allow the product to be open-sourced to be maintained by the hundreds of thousands of people who may still be using the product. You now keep loyal customers once they are ready to upgrade the hardware and you may learn a thing or two from the community on how to make your product better.

Subscripification of EVERYTHING

I think of cars. It’s not enough you have to spend an average of $50k for a new car, plus save for repairs, warranty, and the ever increasing cost of the technology, these companies now want you to pay for access to heated seats. Or driver assist. Or hell, driver assist that will no longer work after 8 years, so you better start saving for the new BMW, because after 8 years they may decide not to offer it anymore. The more ubiquitous subscriptions are, the less control and choice a customer has when making decisions about when and why they want to change. All of a sudden a key feature no longer becomes financially viable for the company to support, so they remove it. If that was a key feature that made you purchase the product your hands are tied. You can’t return the product, and if its a large enough loss to other users in the community, the value of the product you paid for drops, and now you have to purchase a new product taking a hit on the lost investment because of the reduction of that feature. Hence, the value is no longer based on the quality of the hardware or software, but on the hope and prayer the company will continue to support the subscription for those features.

At what point does the printer shut down and tell you you have to purchase a new one because the company no longer wants to keep the servers going? Or the car shut down because the manufacturer decided it no longer wants to support a key feature to keep the car functioning?

Trajectory of Subscriptions & Fees

The scary part of this is what I am seeing the industry march towards. Passthrough costs & fees. Two instances where I’ve seen this crop up is tipping and passthrough fees.

Appfolio

I was reading up on Appfolio, which is a rental & property management service. They are now beginning to charge fees to the tenants to process payments, with supposedly no other method to pay the bill. This trend of passing off costs to the user is nothing new. We see it in transactional fees with credit cards all the time. The kicker, though is the improved profits for the company that instigates the fee, and the loss both for the customer but the business who depends on their software. Business don’t care or won’t switch software because of a passed through fee. Customers have no choice but to use that software to pay their bills. The software company, this case, will make MILLIONS. Here’s the math.

Their website states they manage 7 million+ units. So:

Properties	Fee	Monthly	Yearly
7m	$2.49/payment	$ 17,430,000	$209,160,000

This company will boost their profits by more than $200 MILLION per year. All because of an innocuous $2.50 charge per month.

Tipping

We’ve all seen this required tips many companies have put on transactions. The whole tip your barista, tip on your take-out order, and even tip the self-checkout. My curious thought is these companies, like Clover, Squarespace, Stripe, all take a percent cut of each transaction, no matter the amount. So that is an instant 10-20% boost in revenue for all customers who tip (especially if its pre-selected).

For this instance, lets use an example. Say I get coffee, its about $5 for a cup. Here’s my breakdown:

Coffee	Tip	Transaction Fee	Transaction Amt. (W/O Tip)	Transaction Amt. (W Tip)
$5	$.75 (15%)	3%	$.15	$.17

Now lets do some more math, there are 400 million cups of coffee sold every day. Lets say about 22% of people tip, so 88 million cups of coffee. That extra $.02 nets the payment processors $1.76 million PER DAY (assuming everyone is paying via credit card)

Tipping Coffees/ Day	Tip Payment Processing	​Per Day	Per Month	Per Year
88m	$.02	$1.76m	$53m	$642m

This is rough napkin math, knowing there are many other variables in this I’m not accounting for. Either way, the number is bigger than it should be, but the best way companies can get just a little more profit without anyone really noticing.

This “added profit” by tacking on fees, or adding an innocuous and feel-good feature like tipping, will all end up eating into our wallets more than we want and will likely reduce customers ability to spend, or they will get smart and no longer use those services… if they have a choice. By passing on these fees or changing your method of billing to something even smaller, like per hour, or per product, or even passing them to the users or customers will make it even more difficult to remove ourselves from this financial catastrophe that is waiting to happen.

Light at the end of the Tunnel?

The question becomes, what is the future of monetization? It’s clear to me the industry wants us to think the appification and subscriptification of everything is our future. But I think consumers will have more to say about this. They will hold on to their cars for longer. Or not purchase the microwave that is based on a per use subscription model. Or refuse to purchase products that only connect to the internet at all (if that is a choice we will continue to have.)

The question I ask, is the added tech really THAT much of an improvement to our own personal productivity? Does having a subscription you have to remember to renew or cancel plus the added development cost and time it takes to manage that system add to the printers ability to perform in any way? Or is it just a method to cash in on an ever decreasing price consumers are willing to pay as we race to mediocrity?

The last thing I’ll leave you with is I hope the laws that are made to dissuade companies from adding “junk fees” will expand to “junk subscriptions” that are made to enrich the corporation rather than benefit the customer and offer value customers want.