There are any number of different licensing models. For commercial software the main ones are:
- subscription
- outright purchase, with annual maintenance
- outright purchase, with free minor upgrades and paid major upgrades
- outright purchase, with free major and minor upgrades for life
Subscription payments and purchase + maintenance are nice, if you can get them. They give a more predictable cash flow for a business and you can generally charge a higher lifetime price than you can with a single payment. But this isn’t appropriate for all types of software. For example, it doesn’t make much sense for lower priced desktop software. Assuming subscription or purchase+maintenance isn’t an option, the question boils down to – should we charge for major upgrades?
Let’s look at the numbers for a simple (contrived) example. AcmeSoft sells 1000 licences of v1 of their product in year 1, 2000 licences of v2 of their product in year 2, 3000 licences of v3 of their product in year 3 etc. Each year 50% of the customers who bought the previous version (new or as an upgrade) pay to upgrade to the latest version. The upgrade costs them 50% of the initial purchase. How much is the upgrade revenue worth? We can create a simple model in Excel:
Income new licences (blue) vs income from upgrades (red). Click to enlarge.
Percentage of annual income from upgrades. Click to enlarge.
In year 8 the upgrade income is actually worth more the new licence income. By year 10 upgrades are worth some 60% of yearly income for the product. If the product has a 10 year lifespan, nearly 50% of the total income from the product will be from upgrades. So it only makes commercial sense to give free upgrades for life if this will at least double the conversion ratio[1]. This seems highly unlikely. You can always try changing your upgrade policy and measure what effect it has on your conversion rate. Not much, I would guess (if anyone has tried it, I would be interested to know the results).
Even in a more pessimistic model where only 30% of customers upgrade and they only pay 30% of the new licence fee, upgrades still account for nearly 25% of total income over 10 years. You can download the spreadsheet and play with the parameters yourself.
Upgrade income becomes particularly important when:
- A product has a long life span.
- Customers are very likely to upgrade to a new version.
- There is little growth in new sales.
In the worst case you could end up with a product with a huge customer base built up over a long period, but which makes very few new sales as it has saturated the market. Free major upgrades would mean that each major release is then going to result in large expense (developent and support) but very little income. Microsoft must be very happy they didn’t offer free upgrades for life on Windows or Office!
I don’t see anything unreasonable about charging for major upgrades. The vendor has to do additional work to add the new features and existing customers can choose whether the new features are worth the upgrade fee. However customers have certain (not unreasonable) expectations for paid upgrades:
- The fact that the customer is expected to pay for major upgrades needs to be made clear before purchase.
- Any major bugs in version n should be fixed before releasing version n+1.
- A major upgrade should have significant new features.
- Major upgrades should not be released more than once every 12 months.
- The upgrade fee should be reasonable. Around 40% of the cost of a new licence seems typical.
- There should be a grace period for free upgrades. E.g. If I buy v1 of a product on 01-Jan I don’t expect to have to pay an upgrade fee for v2 released on 02-Jan. Typically this grace period is 3-6 months.
If you are offering free upgrades for life currently, you can change your policy to paid major upgrades. But, obviously, you will need to honour free upgrades for everyone who purchases before the change of policy.
There are some, apparently successful, companies that offer free upgrades for life (Axialis for example). But I have heard many tales of small software vendors regretting their initial decision to give free upgrades for life. The easiest customer to sell to is the one you already have. If you don’t charge for major upgrades, are you leaving large amounts of money on the table?
[1]Ignoring inflation, interest etc.
Successful Software 
I don’t mind paying for upgrades – as long as they’re either giving new features I want, or are due to the platform changing so much that a significant amount of work was required for the software to continue working – e.g. porting from Server 2003 to 2008.
The worst experience I’ve had with upgrades was when I came across a major bug in a well known development tool. The vendor refused to fix until the next major version, despite the fact that it would have been easy for them to fix it in the current version. Needless to say, I wasn’t pleased. They also placed a rather miserly cut-off date, so that even though I’d bought the previous version only months prior to the new one being available, I had to pay full price for my upgrade. I was going to upgrade to the new version anyway, but to be forced to – and forced to pay full price again?
Remember that those who recommend your software will be just as happy to relate their tales of woe.
I didn’t mention the name of the company I had trouble with because, despite my experience with their ‘personal’ licencing, their product is truly fantastic and well worth spending company money on. Just don’t expect them to play fair.
You are not counting the sales increase you get by offering free upgrades for life. I sell about 30% more units due to offering the free upgrade plan (post sale analysis).
I recently worked at a company where(to my surprise) almost all of the revenue was gained from upgrades.
The product (although inexpensive and very good) proved difficult to market to new customers, but once they had customers, they generally had them for life.
>You are not counting the sales increase you get by offering free upgrades for life.
I am saying it only makes commercial sense to offer free upgrades for life if the increase in conversion ratio at least makes up for the lost upgrade revenue.
>I sell about 30% more units due to offering the free upgrade plan (post sale analysis).
Interesting. Is that the difference in conversion rate before and after a change of policy? Is there enough data to be statistically valid?
Who says you can only ever have one product?
To take an alt-MS example. Even if an alt-MS had offered free upgrades for life to DOS, do you really think those upgrades would have to necessarily have included, upgrades to their other operating system products such as Xenix, 16-bit Windows, 32-bit Windows, 64-bit Windows, etc….. I don’t think so.
To put it another way, if you did give free upgrades for life to Perfect TablePlanner, that means you’ll give them free upgrades to version 2, 3, 4 of that program. But it doesn’t mean that you’ll give them free upgrades to Super TablePlanner, Mega TablePlanner, etc.
Pingback: Contextures Blog » Free Upgrades For Life
I have thought about this a lot and finally decided against free upgrades for life despite the fact that Axialis and many other competitors of mine offer them.
I believe the decision whether to offer free updates or not should depend on what you plan to do with the software in the future. If you plan to add a lot of new features and work as much on the software as you have so far, do not give your work for free. If, on the other hand, you only plan to fix bugs and occasionally add a thing or two, you should give updates for free. You can also switch to free upgrades later, when you have reached the appropriate position or cannot work on the software as much as before.
I think a lot of the people who offer free lifetime upgrades are not thinking about this from a 10-year perspective like you’ve done here. They’re doing “30 day challenge” type products that they built in a few weeks and decide to put out there to see if they will sell. There may never BE any upgrades, so offering free lifetime upgrades is just one of those selling points that sounds more impressive than it probably will end up being (like stock options in a pre-revenue startup).
Axialis is a significant exception. They do upgrade their product regularly and I’m surprised they can offer lifetime upgrades the way they do. As a customer, I’m not complaining, though!
I completely agree with you about leaving money on the table. Finding a stream of recurring revenue is pretty important for a software company, particularly as it can smooth out fluctuations in product sales.
I completely agree that in many instances a life time free upgrade policy is counter productive to any hope of business development. I disagree with Jesse on it being confined to a mindset of people doing “30 Day” events. It’s more complex than that (and pervasive). I tend to suspect (through talking to developers over the years) that there is more connection with a fear of charging money period than purely a lack of forward planning.
> Interesting. Is that the difference in conversion rate before and
> after a change of policy? Is there enough data to be statistically
> valid?
Andy,
asking for statistics, how about the other way round? Not every customer is likely to pay for updates, many will rather stick with the old version, despite new features.
So, how many customers (I know, depends on the software) in general are likely to pay for updates? Is it worth the loss of a good sales argument?
(I take it, that the 50% in the post are just a guess and not statistical data, right? Sounds too nice to me ;-)
Yes, 50% was a made up figure (I said ‘contrived’). I think the figure will vary greatly depending on the type of application. 50% is probably rather optimistic for most applications.
Pingback: My thoughts on paid upgrades at Felix Blog
As a business and marketing strategist (not a software expert) I would just add another consideration.
I paid for software a year ago for use on my XP machine and when it died and I upgraded to Vista the software was no longer compatible and the company had no plan to upgrade my version–I would have to buy a new one. Which brings up a psychological point–many average users of software expect that the software will perform as purchased for some period of time (like buying a hard good) before needing replacing. We can speculate on how long that is, but without significant improvements in functionality I would speculate the time frame is likely around 2 years (just my guess).
Paying for upgrades seems reasonable-but not yearly.
Secondly, the more expensive the upgrade is the more likely people will consider sticking with their old versions (I’m talking about average users). For example I am using MS Office 2003 and can see no good reason to upgrade any time soon.
All this being said, I also have concerns with ‘free upgrades for life’ as I wonder about the viability of the company I’m dealing with or if they intend to make money from me in other ways???? (i.e. is this some sort of scam?)
Charging for updates has a hidden cost: the need to provide tech support for old versions indefinitely. If someone asks for tech support on an old version, you can’t reasonably demand that they pay for an update before you’ll help them.
Charging to upgrades doesn’t mean you have to support old versions indefinitely. Microsoft doesn’t. Neither do I.
Also, just because you offer free upgrades, doesn’t mean you can reasonably refuse to support versions other than the latest IMHO.
“just because you offer free upgrades, doesn’t mean you can reasonably refuse to support versions other than the latest”
Sorry but I don’t follow you there at all. When upgrades are free, it doesn’t make sense to support older versions, fixing bugs requires getting the release with the bug fix. If the customer doesn’t want the free bug fix that is their own business, but I don’t see how providing that bug fix isn’t support.
There is more to support than bug fixes. A customer might just want to know how to carry out a particular task.
I’ve been giving this a lot of thought as well.
One of the nice things about offering free upgrades for life is that you never have to support old software. And of course, it’s a very nice thing for the customer.
But in the long-term what will happen? Will your sales dwindle? And will you be supporting your software forever on an ever decreasing revenue stream leading to the company’s eventual failure?
So I think what I’m going to do is a compromise. I’ll offer free major version upgrades for 5 years after a purchase. After those 5 years, they’ll have to pay if they want to upgrade to the next major version.
Doing it this way has many of the same advantages of offering free upgrades for life, without the risk of severely hurting your long-term success.