Sunday, February 19, 2012

A Comparison Of Various Software Revenue Models

One of our first tasks at is figuring out what revenue model to use.

To do that, I put together a comparison of various options.

What did I miss?

Old SchoolCharge a lot for a license, and a lot for upgrades and support.Lots of revenue (if not profit) from each sale. Captive user base if you can get away with proprietary data formats. Recurring revenue stream if you can keep convincing users to upgrade.Horribly expensive up-front development costs. Enterprise/government sales. Four-legged sales calls. Weird revenue-recognition issues limit ability to please users with new features outside of planned (and charged-for) upgrades. Users can wake up one day and realize they're paying way too much for your software and start looking for alternatives. License schemes are inevitably hacked.Works well for professional software that performs highly specialized tasks and that needs skilled support (CAD/CAM, circuit design, etc.). Licenses can be node-locked or floating.
Pay OnceCharge a lot for a license, but provide perpetual upgrades and support for free.Customer loyalty after getting them to cough up the one-time payment.No additional revenue from customers, despite their loyalty. Better hope you can continue to make more new sales.
Worry About It LaterGive the software away in order to get network effects, then figure out how to make money.Everyone says this is the way to start software companies these days. Easy to get VC buy-in. Speeds time to market because v1 of product doesn't have to be very good because it's free.Running out of money while waiting for network effects. Giving up bulk of control of company to VCs, because they're the only people with enough money to pay for the overhead (including ever-increasing support costs) while waiting for network effects. Few areas remain in which there is not already a clear winner of network-effects race.
Free With AdsGive the software away in order to get network effects, and charge for ads.Same Pros as "Worry About It Later". Worked great for Google.All of the Cons of "Worry About It Later" (because ads won't pay until network effects kick in), plus: Ads annoy users, and can look cheesy, reducing appeal of your site. If site provides a service to a company, ads for company's competitors annoy company.
"Freemium"Give the software away except for premium features, and charge for those.Same Pros as "Deferred Monitization". Free gets the network effects, while charging generates revenue. Worked for Evernote.Have to be extremely careful deciding where to draw the line between free and premium features; get that wrong, and either free won't be usable, or it will be so useful nobody needs premium (in which case site degenerates into entirely free).Fees are typically a monthly subscription, but other approaches could be used. Fun fact: Evernote was 15 minutes from bankruptcy before being saved by an investor.
TieredCharge for different levels of features and/or service, but always charge something.Always generates revenue (if not profits). Entry-level tier can be very inexpensive, but still cost enough to avoid the Cons of the various free approaches.Users may only opt for lowest tier, reducing profitability.Fees are typically a monthly subscription, but other approaches could be used.
Flat RateCharge a single fixed rate for unlimited access to all features.Simple for users to understand. Always generates revenue (if not profits).Users that only want a small subset of the features feel they are subsidizing the power users.Fees are typically a monthly subscription, but other approaches could be used.
CrippledGive away a version of the software that is missing key features and/or has limits on size, execution speed, number of calculations, support, etc. Hope users see enough potential in the software they pay to remove limits.If limits are lax enough for users to get some decent experience with the software, they may not need anything more than that. If limits are strict, users cannot test out the software to see if it will actually scale. License schemes are inevitably hacked.Freemium-on-the-desktop?
Time's UpProvide a fully featured version of the software that stops working when the trial period expires. Hope users see enough value in the software they pay for it.Users aren't hampered by limits, and are able to really test the software.Users may only need to use the software for a brief period, which they can do without paying anything. License schemes are inevitably hacked. Time-based schemes can be defeated by running in a VM with a skewed clock.
Nag, Nag, NagProvide a fully featured version of the software that pops up an annoying modal dialog on launch. Hope users see enough value in the software, and are sufficiently annoyed by the modal dialog, to pay to make the dialog go away.Users aren't hampered by limits, and are able to really test the software.Users resent being deliberately annoyed. Scheme for suppressing modal dialog can be hacked.A variant of deliberate annoyance: give away a fully featured version of the software that has ads, and offer an option to pay to turn off the ads.
Guilt TripGive the software away, but ask for donations.Works great for wikipedia.Appeals to users' better nature, which may or may not be effective. No guarantee of running without losses.Can be simple donate button, or concentrated donation drive (like wikipedia).
Per DrinkCharge a tiny amount for each operation performed by user.Nicely fits scalable cloud-computing hosting model, because revenue growth and hosting charges are both fine-grained. Tininess of charged amount can entice users into signing up.Users underutilize product to avoid charges, which diminishes acceptance. Users don't like not knowing how much they'll wind up owing. Some users feel like they're being nickel-and-dimed.Probably a better fit for service APIs than for end-user UIs.
PlatformBuild a platform and share revenue with companies that write applications for the platform.Worked for Salesforce.Nobody will write apps for a platform that isn't popular, and a platform won't be popular until it has apps. Which means many of the same Cons as "Worry About It Later"
ConsultingGive the software away, but charge for consulting.Consulting rates can be pretty good, particularly if the software becomes popular. Being free, the software stands a chance of becoming popular.Scale of company is limited by rate at which qualified consultants can be added.A good model for an independent software developer.
Support OnlyProvide support for a product sold by some other company.No software to write or maintain.Company selling the product may fight you, because they intended to make money on support. Same scalability problems as "Consulting".