Will subscription model survive on-demand trend :: Comindwork, online project management and collaboration.

COMINDWORK: Talk: Will subscription model survive on-demand trend

01 September, 2009 17:52

Recently, there’s a lot of talks about total cost of SaaS, and why it’s not getting so much adoption from users. We at Comindwork are both vendor of SaaS solution, and active SaaS adopters. One of our goals is to make our work completely virtual, without using any in-house infrastructure. That’s what on-demand promises to be easy. But what’s bothering, is current payment schemes.

Business model of most SaaS vendors is "monthly subscription". It has already become the most widespread model, but is it the best one? Using SaaS is not renting an application - it’s an old ASP point of view. You’re actually getting the service. And “paying for the service” is different from “paying for availability of the service”, though it may interfere. I’m not too good in legal differences, but I believe when user is inactive, one should not be billed. You’re not paying for just the availability of electricity, right?

That’s why we’ve took a look at the experience of cell phones operators. As a starter kit, they usually offer “prepaid credits” model of payment. This is really nice when using the service from time to time. Applied to SaaS, we call this model “pay-as-you-go”. Not so buzzy, but true. Customers put credits on their balance, and the balance is decreased only when you’re using the service. This is especially cost-effective solution for small companies with unstable financial and work flows. And it’s a perfect solution for times of recession, when business may need to change really quickly.

There may be different ways to define and meter “usage”, based on time or amount of consumed service. Applied to project management, this can be amount of projects, or amount of total actions performed in the environment. Yet, we’ve stopped on the simplest model: customer companies pay only for the days when service is used, i.e. someone from the company is logging in and doing anything with the data.

The “pay-as-you-go” model has shown good results for us. Those who are not ready for stable use within the whole company, choose to pay on daily basis. The amount of users of pay-as-you-go is 36% of all users, and is constantly growing. We receive 40% of all payments as credits for daily use.

The same model is now used by Amazon Web Services platform, though for small businesses it feels like a trick: if hosting a simple system on single server, you can’t stop using the server. Again, customers pay for the availability of the server, but not the effective load.

Sure thing, such approach makes it harder for SaaS vendors to get stable income. They need to make their service a part of customer’s life, make it more adoptable. And thus balance on the razor edge between micro-payments and corporate prices. And it’s a good challenge for anyone.

It’s a good question for me, whether subscription model would survive on-demand trend. Please let us know what you think of the future of on-demand business models, and especially pay-as-you-go model implemented by Comindwork.

And, our sincere congratulations on Knowledge Day!

Keep talking!
Alex

8 comments

Tueday, 01 September 2009 23:51 by Roman Vorushin visitor

You guys are very brave!

September 02, 2009 by Alex Postnikov @ NI

Thanks Roman! :)

Tueday, 08 September 2009 15:10 by Matt visitor

Perhaps you are need of new hosting that allows you to "use on demand" the same what your customers do. Not sure if these services are right for you but perhaps it'll inspire you to find a similar and appropriate dynamic hosting solution:

https://www.godaddy.com/gdshop/hosting/grid.asp?se=%2B&ci=13630

http://mediatemple.net/webhosting/gs/

September 17, 2009 by Alex Postnikov @ NI

Matt,

Thanks for the proposition!
We're using Amazon at the moment, though constantly monitor all the possible infrastructure changes. Actually, any variant satisfies our needs in virtualization and "clouding" (as Comindwork is not completely built as cloud solution, it's Microsoft servers based).

Thanks!
Alex

Tueday, 08 September 2009 22:21 by Lincoln Murphy visitor

Alex... very interesting pricing metric. I'm always happy to see SaaS vendors looking outside of "per user, per month" pricing metrics for their subscription revenue model. I have seen both success and failure with the credit system you are implementing. The failures have occured when that pricing metric was simply not aligned with the way the market wanted to buy. It was great for the vendor (cash up front is always great), but the clients didn't want to do credits. If your market says they'll do this, great.

You do touch on one point that is key... most pricing models for SaaS are not really "pay as you go" or "pay only for what you use" as many pundits who missed the boat will tell you. If you pay in arrears, its pay for "what you used last month" and if you pay in advance its "pay for what you think you'll use next month." Other than credits, the only way to really pay as you go is to do micro-payments in real-time and the transaction costs are still too high for most vendors to sustain that model.

I hope this works out for you... please keep the community updated on your progress.

- Lincoln Murphy
Sixteen Ventures

September 17, 2009 by Alex Postnikov @ NI

Lincoln,

Thanks for the comment! We're really cautious to play with different business models, though not giving up the experiments. Maybe in US the SaaS has already defined itself, but in different parts of the world it's behavoir is different. For instance, in Russia it's real Wild West. Nothing is working as it should, and it's a good place for testing new approaches.

Alex