Business Models in Software Development: Subscription vs. One-Time Purchase

You may have turned your brilliant app idea into a tangible reality, but that’s only half the battle. Often, the real challenge is raising money efficiently. Canalys suggests two third of business applications fail due to a lack of coherent revenue strategy.

The challenge for businesses is choosing between two main revenue models:

Subscriptions and one-time purchases. Both of these models have unique advantages, challenges, and suitability based on several factors.

However, the question remains: Which model should be adopted? What pitfalls can come from each? And how can they find the right one to complement their mobile app development journey?

Dive into our analysis as we delve into the intricacies of each of these models and help you take the best path forward for your business.

Subscription Model

This model thrives on regular intervals of payment, offering users consistent value via continual access and updates. Embracing this approach promises steady cash flow and high user involvement.

This revenue model offers a variety of benefits both to the businesses and to the consumers. Here are some of them:

• Recurring Revenue: Taps into recurring consumer needs, ensuring consistent value and predictable recurring revenue.
• Data-Driven Decision: Making large datasets allows businesses to understand their consumers better and strategize for success.
• Customer Lifetime Value (LTV): Subscribers often have a higher LTV as they pay recurring fees and can be targeted for upsells, cross-sells, and referrals.
• Market Penetration: Subscriptions often have lower initial costs, making them more accessible to a wider audience and potentially increasing market penetration.
• Community Building: Subscriptions offer a sense of community and belonging, fostering stronger customer relationships.

Subscription model has gained a lot of popularity because of its benefits to businesses and consumers and given rise to the subscription economy. However, when implementing a subscription-based revenue model, businesses must begin by analyzing market demand and customer needs. Choose a subscription management platform like Chargebee, Zuora, or Recurly to manage recurring billing. Ensure consistent content or feature updates to retain subscribers. Promote trial periods or discounted rates for initial engagement.

Downsides of Subscription Model:

• Churn Risk: Easy to sign up but also easy to cancel; any sub-par experience can lead to subscriber churn.
• Need for continuous improvement: Requires constant, user-centric product/service development, revising of subscription plans, and improvement in customer support.
• Pricing Complexity: The challenge to strike a balance in pricing to ensure that users see the product’s worth equal to the amount they have to pay.

One-Time/Pay-Per-Use Model

Opting for the One-Time/Pay-Per-Use Model means charging users upfront or based on specific usage metrics. It offers straightforward value and eliminates recurring financial commitments for the user.

The following are the most significant reasons why business owners choose the Pay-Per-Use Model:

• Lower Customer Acquisition Cost: By allowing customers to pay only for what they use, they no longer need to spend big bucks on accessing their desired software solutions, thus lowering the barrier of entry for new users.
• Affordability and High Flexibility: Users are charged only for what they use, ensuring no unused service fees and attracting more users.
• Data on Customer Usage Patterns: Valuable insights into market demands and user preferences are gleaned, aiding targeted product development.

When implementing the Pay-Per-Use/One-Time Payment model, set a fixed price based on perceived product value. For pay-per-use, integrate analytics tools like Google Analytics to track usage patterns. Use payment gateways like Stripe or PayPal for secure transactions. Regularly review pricing based on customer feedback and usage metrics.

Downsides of Pay-Per-Use Model

• Unpredictable Revenue: Usage-based billing doesn’t guarantee stable revenue, relying heavily on continuous customer engagement.
• Complex Pricing Structures: Difficulties arise in setting up and maintaining fair, competitive, and value-aligned tiers and models.

Still confused about which model suits your software product better? No worries. This section will help you make your final call.

How Business Owners Can Choose the Right Payment Model?

Making the choice between the subscription and the one-time purchase model is more nuanced than simply considering the immediate financial returns. In a broader context, it’s an intricate process that hinges on several variables, each playing a pivotal role in determining the success and sustainability of your software product.
Understanding these factors can mean the difference between momentary success and long-term profitability. The key factors are as follows:

1. Product Type

The single biggest factor in choosing the business model is the nature of your product. Ask yourself, what does your product offer? Business feasibility suggests that the products with constant updates, regular maintenance, and vast library/database suit the subscription model. Usually, all cloud-based software products and SaaS solutions fall under this category.

Conversely, the standalone products, which offer instant value and don’t incur any continued updates, are better sold via a one-time payment model. Since the software product is supposed to provide a defined value, charging a fixed payment against it makes sense.

Example:

• Photoshop, a famous graphic designing software, charged $400 initially as a one-time payment model. But later converted their pricing to $19.99/month, which was more feasible for its users.
• Similarly, a subscription model is most suitable for software such as Microsoft365 and Spotify, which allows us to access their libraries (multitudes of products).

2. Customer Expectations

What your customers think about your product and how they interact with it largely influences its business model. If your software product is supposed to be used occasionally, has a perceived value, and doesn’t offer consistent updates, a one-time payment model is preferable. This provides an affordable means for customers to use your product without additional charges.

However, when a software product offers a multitude of value prospects and can be accessed regularly, the idea of selling it all at once won’t be feasible here. Since customers would prefer gauging the product’s value and trying it out before investing in it, the subscription model stands out in this arrangement.

3. Market Trends

It’s imperative for business owners to stay tuned to market dynamics to create optimal products. In the technology sector, the trend is leaning towards a subscription model, and more and more businesses are opting for the SaaS (Software as a Service) model.

Since the subscription model only sells a restricted license version, this method enables businesses to manage their hosting easily, build onto a set profit margin, and provide upselling/bonus options with easy payments and security.

Therefore, no matter what type of audience you are targeting and what problems your software product aims to solve, it is vital to conduct a thorough competitor analysis. This will give you an idea of how similar businesses monetize their apps.

How are their customers responding to their models? And how you can overcome the gaps in their monetization strategies and win it for your product.

4. Financial Stability

The premise of any financial model is to earn sustainable funds for the software solution. Whatever payment method a business chooses, the main idea is to lower the entry cost to push more and more customers to spend. While retaining the existing customer base, the method should also devise viable strategies to attract new buyers.

In terms of financial stability, here is what the respective payment models have to offer:

• The allure of a subscription model lies in its promise of recurring revenue. This steady cash flow aids business forecasting and ensures more predictable financial stability.
• Conversely, a one-time purchase model can offer substantial immediate returns but might present challenges in maintaining consistent revenue, especially if new customer acquisition stagnates.

5. Customer Retention Strategy

No matter how successful your product launch is, if your software solution doesn’t implement a solid customer retention strategy, it’s a failure in waiting. According to BusinessofApps, 80% of apps released yearly get abandoned after the first use.
Instead of relying on sales forecasts, a viable customer retention agency will help an app expand its existing customer base while improving the income stream apps.

• Subscription models inherently push businesses towards constantly adding value, ensuring customer retention. Regular updates, new features, and consistent user engagement become integral.
• With one-time purchases, retention strategies might shift towards upselling or cross-selling other products. The focus might be more on post-purchase support and ensuring the product remains relevant and valuable to the user.

Understanding these factors will guide your choice and shape how you design, market, and support your software product. Making an informed decision now can secure your business’s future and ensure you effectively cater to your target audience.

Wrapping Up

Subscription or One-time Pay? The answer to this will vary from business to business. By weighing each model’s advantages and disadvantages, anticipating future market trends, and assessing compatibility with your product, one can predict the success of either model implemented.

Whether your app is in its ideation phase, amid development, or close to the launch stage, choosing the right monetization strategy can be intricate and demanding.

However, there is one way you can escape all the hassle and create an optimal strategy to make your app vision translate to a sustainable and lucrative reality.

Want to know how? Partner with an established mobile app development company and ease your app journey to success. Our team’s expertise goes beyond development to create bespoke monetization strategies tailored for success. Join hands with an experienced team today, and let’s elevate your app’s journey together!