The Problem With Subscription Software/Media Is High Prices

I am a big believer in subscription models — both for software and for media. As such, I often bring up the topic with friends to get their take, since more publications are moving from ads to subscription, and more apps are doing so as well (for instance, through in-app purchases in the App Store for iPhone).

The consistent view I have gotten is that people absolutely hate subscriptions. That hate is particularly vituperative when it comes to content, but software is given no mercy either. And listening to some of my friends and their stories, it seems people will go to the ends of the universe to avoid paying some of these fees.

That said, nearly every person I talk to does pay for something, whether it is Netflix, or The New York Times, or something else. And many seem happy to do so.

Where’s the disconnect? While we can talk about perceptions of quality, utility and many other facets of products, I think the simple answer is that most subscriptions are just incredibly overpriced.

Take a couple of popular products as examples. 1Password is $60 annually for a family license, Pocket is $45, and while Evernote has several tiers, Premium comes out to be $69(!). I do pay for these licenses, but they seem shockingly expensive for the real value I get out of them. How many people — probably with less disposable income — saw those prices and just walked away?

It isn’t surprising that most software companies are priced this way. The traditional advice from VCs for years has been to just ignore cheaper users. “Fire your cheapest customers” and “just raise prices” are heard ad nauseam. VCs actively won’t fund startups where the average revenue per user is in the single digits, because past experience shows that those businesses have difficulties succeeding.

That have have once been true, but I think the Internet and the infrastructure of services available is changing the pricing math here.

I argued yesterday that companies that focus on elite customers tend to stay there, because it is really hard to bring a company down to a broader range of customers. When you build your entire model around a $50/year repeating customer, it is really hard to adjust a company to start focusing on $5/year users. Traditional customer acquisition models fly right out the window, as does customer support. A single support ticket might knock out the margin from a dozen users right off the bat.

That said, $5 a month is not a “normal” price. Outside of the latte-drinking set in Manhattan, most people don’t want to buy a dozen apps at this sort of price point. If you did, that would be $720 a year, and very few consumers actually have that kind of spare change lying around to purchase subscriptions. In short, it should surprise no one that people blanche when you ask them to fork over such dollars.

However, I think there is actually an incredible market for lower-priced services that are priced more reasonably for the wider public. To do so requires the founders of a company to be very disciplined around finances, margin structures, promises to consumers, and frankly, focus. Solve one key problem for a major swath of people — and then don’t charge a lot. There is nothing that people like better than a steal, and the word of mouth for a cheap service that solves an important problem is just gold. Again, some of the largest companies in the tech world such as Amazon have played this strategy to perfection.

Certainly every product may not make sense here, but don’t overlook the fact that tens of millions of people could potentially pay a few bucks a year for a service. That kind of revenue is hard to come by for even the most successful companies, and is worth a look by more product founders.

Photo by Hamza Butt used under Creative Commons.