The business model for software has seen tremendous change in the last decade. Gone are the days of buying software in large boxes from retail store for a hefty price. Gone are the days when you needed to pay nearly as much to receive updates to the software you purchased. For instance, in the past, if you payed $50 for a version 1 of a software, you were expected to pay another $50 for version 2. In many instances, “upgrade” prices would slightly reduce the cost of the new version, but not by much. Today, with a few exception, that is not how it works. Only a few big name software has been able to hold on to the tradition, namely Microsoft Office and, until recently, Adobe Creative Suite. But even these software makers are moving away from the old model. We are truly moving to a new era in software business.

Today, we no longer think of software as discrete versions. Instead, we see software that is dynamic and evolving constantly. This is very much like how web services and apps work. For instance, we never think about Google search as version numbers. We don’t go to Google version 15.1, nor do we have to “upgrade” to the latest version of Google to take advantage of HTML 5 or new web technologies. Rather, Google evolves as the technology evolves. We don’t notice it. The Google search of today is not the Google search of five years ago. Yet, to us, it has always been the same, one, Google. This is what software is becoming. We now look at software and games just like web services. So what does that mean for the business model of software.

Well, now it doesn’t make sense to charge for discrete software upgrades. In fact, the modern app stores were not designed to make it easy for such business model. All app stores allow developers to push updates for free and there is no options to charge customers for the updates they push out. Sure, you can list the upgrades as a totally new app, and delist the old versions, but that upsets existing users who purchased the old version because they are not used to this model. Mobile app customers, especially, are used to the pay once mentality for app purchases. They expect all future updates to be free. Stopping updates actually lowers the app rating by customers. In fact, when I look at a mobile app, I try to note when the app was last updated. If I see, for example, that an app has not been updated in the last two years, I automatically assume that the developer has abandoned this app and would not be inclined to download the app free, much less pay for it. That is just the mentality.

So how does the developer expect to get paid for their hard work. Surely, to expect to pay only $0.99 for an app and get years of updates for free is absurd and doesn’t make financial sense for the developer. It’s like getting paid the first year of salary and being expected to work for years without any salary. The solution involves ongoing revenue stream. In the past, a constant revenue came from charging for upgrades, but now that’s not viable. Instead, the constant revenue stream comes from in-app purchases and subscriptions.

Free apps that include in-app purchases for free app is labeled as “freemium” apps. The fremium business model is defined by an app that is free to install and use but includes paid upgrades to enhance the app experience or unlock more features of the app. Many such models, especially games, involve in-app purchases that expire. So, that way, users would have to keep purchasing the same upgrade for continued use. For example, you can buy a powerup for your character in the game. When the powerup is used up, you’ll need to buy it again. The fremium model really works, and it works really well. In fact, this model is the most profitable model currently in the Apple App Store ecosystem. This means that customers are willing to pay for in-app purchases, even if it means paying again and again. This constant stream of revenue means that the developers can provide continued support and updates for their apps and games while getting paid. This is win-win for both customers and developers. The customers will get experience an app or game that, in theory, gets better and better while developers have the monetary incentive to keep updating the app or game.

A less used, nonetheless viable, model is the subscription model for applications. This model treats apps just like services you pay for in your regular life. If you hire a housekeeper, you pay a regular fee and the housekeeper provides service as long as you maintain the payments. Online services, such as web hosting and cloud storage works like this as well. Applications as a service works much the same way. There is no version numbers you have to worry about. You pay a regular fee, and you use the app for as long as you maintain payment. In the bakcend, the app gets all the updates, support, and patches needed to meet your needs. You always have the latest and greatest features and never have to worry about upgrades, license keys, discs, etc. Big software like Adobe Creative Cloud, and Office 365 works this way. You get what is essentially a full desktop software as a service. There is not version; it’s simply the application and the service it provides.

Mobile software are also using this model too! Microsoft is expected to unveil Office for iPad on March 27th that will likely run on this subscription model. Since app stores are not designed for paid upgrades in mind, this is the only way customers can expect to get the latest versions of Office on the iPad. Even smaller developers are using the services model to ensure a constant revenue stream. Tweetium, for instance, allows you to buy into a pro subscription that will give you more features. If enough people are paying for the pro subscription, the developer of Tweetium, Brandon Paddock, will have financial support to continue updating and enhancing the application for its users. Again, it is a win-win situation.

Finally, I want to note that I did not forget free apps that are ad-supported. These apps are there, and they will continue to be, but for developers looking for a constant, predictable, revenue stream, freemium and subscription model is the way to go.

Leave your thoughts in the comments below. I would love to hear what you think!