upgrades | Successful Software

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.

Some years back my wife bought a PC and got a ‘free’ inkjet printer with it. It was a really lousy printer, but hey, it was free. When it ran out of ink we tried to get a new inkjet cartridge, but the cheapest set of cartridges we could find was £80. That was 4 times the price of other comparable cartridges at the time. Some further research showed that you could buy the printer for £20 – with cartridges! Their ugly sales tactics didn’t work. We threw it in the dustbin and bought an Epson inkjet, which gave years of sterling service using third party sets of cartridges costing less than £10.

When I started my company I had a thousand decisions to make. One of them was which software to use to create and maintain my new product website. It just so happened that my new ISP (1and1.co.uk) was offering a bundle of ‘free software worth £x’ when you signed up (I forget the amount). It included a web design package (NetObjects Fusion 8 ) and an FTP package (WISE-FTP). Hoorah, free (as in beer) software and 2 less decisions to make. I was weak. Instead of spending time checking out reviews and evaluating competitors, I just installed and starting using them. It didn’t occur to me that they might be using the same sales tactics as the manufacturer of the lousy printer. In this imperfect world, if something appears too good to be true, it usually is. And so it was in this case. I grew to hate both these pieces of software.

WISE-FTP was just flaky. It kept crashing and displaying German error messages, despite the fact that I had installed the English version. No problem, I just uninstalled and installed FileZilla which is free (as in beer and speech), stable and does everything I need and more.

NetObjects Fusion was flaky and hard to use. By saving after every edit I could minimise the effects of the regular crashes and I assumed that I would learn how to work around other problems in time. But I never did. By the time I decided that the problems were more due to the shortcomings of NetObjects Fusion as a software package, rather than my (many) shortcomings as a web designer, it was a little late. I had already created an entire website, which was now stored in NetObjects Fusion’s proprietary database. Some of the bugs in NetObjects Fusion are so major that one wonders how much testing the developers did. My ‘favourite’ is the one where clicking a row in a table causes the editor to scroll to the top the table. This is infuriating when you are editing a large table (my HTML skills haven’t yet reached the 21st century).

In despair I eventually paid good money to upgrade to NetObjects Fusion 10. Surely it would be more stable and less buggy after two major version releases? Bzzzzt, wrong. The table scrolling bug is still there and it crashed 3 times this morning in 10 minutes. Also, every time I start it up the screen flashes and I get the ominous Vista warning message “The color scheme has been changed to Windows Vista Basic. A running program isn’t compatible with certain visual elements of Windows”. Even just trying to buy the software upgrade off their website was a confusing nightmare. The trouble is that it is always easier in the short-term to put up with NetObject Fusion’s many shortcomings than to create the whole site anew in another package.

For want of a better term I call this sort of software ‘upgradeware’ – commercial software that is given away free in the hope that you will buy upgrades. This is quite distinct from the ‘try before you buy’ model, where the the free version is crippled or time-limited, or freeware, for which there is no charge ever. Upgradeware is the software equivalent of giving away a printer in the hope that you will buy overpriced cartridges. Only it is less risky, as the cost of giving away the software is effectively zero. It seems to be a favoured approach for selling inferior products and it is particularly successful when there is some sort of lock-in. It certainly worked for NetObjects in my case.

Norton Anti-virus are the masters of upgradeware. Norton Anti-virus frequently comes pre-installed on new PCs with a free 1-year subscription. The path of least resistance is to pay for upgrades when your free subscription runs out. By doing these deals with PC vendors, Symantec sell vast amounts of subscriptions, despite the fact that Norton Anti-virus has been shown in test after test to be more bloated and less effective than many of its competitors. And if you think Norton Anti-virus doesn’t have any lock-in, just try uninstalling it and installing something else. It is almost impossible to get rid of fully. Last time I tried I ended up in a situation where it said I couldn’t uninstall it, because it wasn’t installed, and I couldn’t re-install, because it was still installed.

I feel slightly better now that I have had a rant about some of my least favourite software. But there is also a more general point – ‘free’ commercial software can end up being very expensive. Time is money and I hate to think how much time I have wasted struggling with upgradeware. So be very wary of upgradeware, especially if there is any sort of lock-in. When I purchased a new Vista PC, the first thing I did was to reinstall Vista to get rid of all the upgradeware that Dell had installed (Dell wouldn’t supply it to me without it). You could also draw the alternative conclusion that upgradeware might be a good approach for making money from lousy software. But hang your head in shame if you are even thinking about it. It would be better for everyone if you just created a product that was good for customers to pay for it up-front.

Ps/ If you fancy the job of converting www.perfecttableplan.com to beautiful sparkly clean XHTML/CSS and your rates are reasonable – feel free to contact me with a quote.