Hi, Andy here. I want to bring your attention to the depressing fact that there are really only two ways to sell software. Well, three, but hardly anybody uses the third. I am, of course, talking of subscription services (SaaS) and advertisement/data driven.
Software as a Business Model
Before people could write software for a living, you had to sell things. Tangible objects that performed a certain function, whose parts cost money, which further cost more money to assemble into a product.
After computers became widespread people began writing software, and realized that other people would pay real money to buy your software. And best of all, software sales were essentially free — simply copy the file onto a new disc and send it over to them. Nowadays, the cost has become even lower, with free online file hosting and storing and sharing, to the point where the only cost of sending software is the thirty seconds it takes to email the link.
This ease of copy+paste came at a cost, however. Previously, when products like washing machines or lightbulbs broke, people would buy new ones to replace them. However, these newfangled software products would never break — they were just bytes on a computer. If the computer broke, the user would just use the same disc they did last time to install the software again. So as a software business, you had a damn easy time mass-producing and selling the product, but to most people you would only ever sell it one time.
This was a problem. Most existing business models at the time relied on the fact that customers would need to buy their product again, over and over. Groceries were eaten, hair would grow out again, and those businesses could depend on a constant source of revenue from returning customers. Though software was easier to make and manufacture, not to mention incredibly lucrative, software companies would die unless they figured out a way to make people pay again and again for things that didn’t wear out. This required a brand new business model.
Licensing as a Subscription (SaaS)
One way to do this was selling a license to use your software instead of selling the software directly. With this, you could charge existing customers annually to keep using the same piece of software every year. This was the beginning of selling software goods as a subscription.
As this business model became successful, companies started introducing a software version of “free samples”; a lite version of the software that shipped with limited features or a time trial. Today, most software is sold as a combination of a free, pared-down version and a paid, full-featured and supported version.
Most modern software companies using this model, including:
Workplace messaging: Slack, Discord
Word processing/Spreadsheet: Microsoft Office, Google Drive,
Code cloud storage: GitHub, Dropbox, OneCloud, iCloud
Cloud computing: Google Cloud, Microsoft Azure, Amazon AWS
Music: Spotify, Pandora, Apple Music
Videoconferencing: Skype, Zoom, Google Hangouts
That’s not all of them though. You’ll notice I didn’t mention any web browsers, or any social media platforms. That’s because there were some visionaries early on, who realized there was lucrative software that people would not pay to use, because there were already free analogues that didn’t require computers. Before browsers, there were (and still are) libraries. Before social media, there were telephones and contact numbers scribbled on a notepad. These already existed for free, and people would be unwilling to pay to replace something free and known with something paid and unknown.
However, people were willing to try this new software to replace old methods, as long as it cost nothing to use. Google never charged money to let people use its search engine. Myspace, Facebook and Twitter don’t make you pay to register an account. The services offered by web browsers and social platforms were necessary and useful, and so people continued signing up.
With server costs piling up, these businesses had to figure out a way to make money from their users that didn’t charge them directly; they knew switching to a paid service was suicide. So, to take a page from newspaper companies, they began showing advertisements in the form of sponsored links that get boosted on search engines or promoted posts on social media.
However, unlike the newspapers, user activity and their interests were known on these platforms, and could be tracked and stored on the servers. If you know user X’s search history of bird cages and birdseed, you’d know they’d probably respond better to an ad for a bird feeder than a gun ad. Click. This was their golden goose: not only could you sell ads, you could also sell user data to be used for targeted ads, which had a better likelihood of paying off, and were therefore worth more money.
The more time users spent on your site, the more time you knew what kinds of ads they’d respond to. And the more time they spent, the more ads you could show them. Payoff became linked to number of hours users spent on your site. And thus the attention economy was born.
Current software companies using this model:
Streaming/Video hosting: YouTube, Twitch.tv
Web Browsing: Chrome, Edge
Social Media: Instagram/Facebook, Twitter
While there is nothing wrong with subscription or ad-based businesses, it does create problems when other markets are influenced and inspired by them:
Encourages Consumer Gluttony:
Subscription boxes are a recently invented example, whether for razors, asian snacks, or dog food. These promise usage of a product on a monthly replenishment basis, similar to subscription software. However, while you cannot buy more Spotify subscription than you need, these subscription boxes can very easily upsell product in quantities that their user doesn’t need or want, all to the benefit of the business. This can create excess consumption, which is bad for the environment, ethos of the company, and the user. Do you really want to run a business that makes money selling product that your customers don’t need?
Advertisement plays into a similar problem. Advertisements encourage unnecessary consumption by peddling unnecessary (and often non-useful) goods, and have to compromise user data privacy in order to do it well. Maybe a good ad can benefit somebody’s life, but I’ll bet you your date of birth and socioeconomic status that you don’t enjoy creepy targeted ads for things you were JUST talking about.
Encourages Corporate Greed:
Because SaaS works so well for enterprise software, its mentality often leaks into consumer products as well, at the cost of non-ownership. Some things simply doesn’t need to be sold on a monthly basis. I’d feel much better if I were able to just pay once to get 1 TB of cloud storage, or for a word processor. Sure, some of the above software is available as a one-time purchase. But notice how none of the large software companies you’ve heard of sell one thing, one time. It’s just not that profitable, even if the customer prefers it.
Selling things as a subscription is also so much more profitable that even necessities are beginning to do it. GMO crops grow much more quickly and robustly than traditional plants, but the companies that modify them would only profit one time if they made the crops produce seeds on their own. The solution? Modified crops are intentionally made infertile so farmers will have to re-purchase seeds from them every planting season. This enables GMO companies to act monopolistic and greedy, all while providing an essential good to the public.
When you do any engineering for long enough, software or not, the idea of optimization begins to leak into other parts of your life as well. And when those engineers start companies, it only makes sense to start by optimizing for profitability, leaving us with “monthly subscription cost per user” and “sell user data and show ads” as the most successful business models for a software company to embrace under capitalism. Capitalism likes to play on our greed and gluttony, buying and selling things that aren’t needed provides profits. However, it isn’t sustainable, and feels wasteful and first-worldly.
As a guy who does computer science and likes to make things, I think it’s a little depressing that “sell something once that works forever” isn’t a feasible business plan; I just want to make something that works, and works well. It feels good to know and provide that for people.
As you finish reading this, I hope you are thinking of alternative business plans; ones that can make a company enough money to survive and thrive, while also delivering value for a customer without excessively charging or overselling them.
If only for the sake of my conscience, I hope something like that exists.
I’m making a few generalizations here, which I will mention for completeness. The only thing off the top of my head that’s managed to stay afloat off of donations alone is Wikipedia. I also haven’t addressed market-based services like Uber, Amazon, Airbnb, and the various delivery services. These platforms charge a fee by enabling transactions using their sites, and therefore don’t sell software as their goods, so I won’t mention them here.