ASP vs. License

I have to say that I've always been a fan of subscription business models (the ASP approach) and dislike lumpy revenue streams (the license approach). But my favor for the ASP approach is tempered somewhat by the difficulty that all of us in the venture business have had making the ASP model work. And there's a lot of money that's been made over the year's with the license approach. The ASP is not easy to execute and takes more capital to get to breakeven. There are trade-offs and the best may be a hybrid model where you give the customer whichever flavor they want.

Ross Mayfield (yes, i am linking to Ross two posts in a row) has some good stuff from the Enterprise Software Summit on this issue. The churn issue in particular is one that I haven't heard enough about.

Comments

[Bennett Zucker]

I was with a venture-backed ASP in 00-01 where no matter what we did with our models and projections, we could not see our way to a profit. Our answer was to start selling licenses and gradually move ASP customers over to installed software. We were pretty successful at it, too, for a while, bringing Compaq, L'Oreal, BankOne and other blue chip customers on board.... Then, well, the money ran out anyway.

My software company today is moving more and more into the ASP model and I am very excited about the possibilities.

Besides the obvious budget and staffing woes of most buyers of software, what has changed to make ASP a great business model today, when it was all but written off as unworkable just a few years ago?

Most important, the market continues to reward innovators who focus on niches with real needs and where the main alternatives are much more expensive licensed software products with much more functionality than most users will ever need. Salesforce is the darling of the day, but another success story is RightNow, the company my former employer battled, and to whom we lost.

Know your customer. Demonstrate clearly how they'll make and/or save money with your product. Make it easy for the customer to buy and use it. Works in every market and industry. In ours, ASP is where to be.

[Omar Javaid]

The group that I've been working in at Qualcomm has been an ASP for over 15 years. It has been very successful and very profitable. In fact, it was the cash cow that funded all of the R&D and commercialization of CDMA. A couple of things about it's success stand out:

1. We know our customers extremely well (e.g. long-haul trucking)
2. We are embedded into the business processes and workflow of our customers
3. They trust us quite a bit since if we went down their business would either completely cease to function or be gravely at risk.

[Anita Campbell]

Having been involved in several businesses with ASP/subscription-based models, I can say this: they are great after about year 3 or 4 -- if you can make it that far and not run out of money first. But they are SO slow and risky to get off the ground. As someone once told me "it's like building a beach one grain of sand at a time."

In the recent past I've done some consulting and always urged clients to offer customers a choice of either ASP or license, just as you suggest. Most startups and emerging companies absolutely have to have the cash flow boost from license sales. But ASP sales are obviously easier to get, and they need those too.

And if a company can get past the 5 year point with a decent ASP model? Well, the revenue line is a beautiful sight to behold. I've been there and the cash just rolls in.