In an interview for WPSchool, Matt Mullenweg mentioned that one of Automattic’s BIG and “silly” mistakes during their first years was not adding automated renewals to WordPress.com. After adding renewals, they started to double their revenues.
“We had subscriptions… but they didn’t actually renew! So you had to come back every year and re-buy everything. Which naturally has a higher churn rate than if you renew it, which every company in the entire world does, it turns out that every company does because our revenue pretty much started doubling! as soon as we did renewals. As I think about all the years we didn’t do renewals, I feel a little silly”
If Matt feels silly, why shouldn’t we, plugin developers, feel silly as well?
Looking at the WordPress plugins market today, the most widely used monetization model is “support + unlimited premium updates”, for a period of a year. And if you want to keep getting updates and support, you’ll have to purchase a license for another year. In fact, everyone is actually selling recurring-payments license but without the automated renewals. Developers don’t admit it, or probably do not acknowledge that, but that’s exactly what it is! I’ve talked to dozens of fellow WordPress plugin developers about this topic, and once I tell them the “truth”, they suddenly start to feel a bit “silly” and question themselves why they don’t auto-renew.
We all hear how SaaS is a wonderful business model–so why don’t we try to use it with our WordPress plugins? Well, most plugins are not exactly “Software as a Service”, but we sell software and provide support as a service with the license– which sounds close enough to me.
What’s the beauty with the recurring revenues model?
First, you can estimate how much money you are going to make by the end of the month (MRR – Monthly Recurring Revenues). Then, you can precisely project your growth once you know your conversion rates and churn rate. Recurring payments will enable you to turn your business into a data-driven company by knowing all your KPIs (key performance indicators). These metrics are invaluable for various reasons like budget planning for hiring, marketing, and so on. You can read a lot more about the benefits of SaaS businesses with this terrific SaaS guide by David Skok, serial entrepreneur and a VC at Matrix Partners.
Having said that, monthly recurring payments are much harder at the beginning, since the payments are smaller. But once your customers base grows, you can build a much more sustainable and scalable business than with a model that uses one-time payments – which is much less predictive and market dependent. For example, when you push your Black Friday promotion you can make tons of money, and that’s all fantastic, but what happens for the next month? How do you maintain that momentum? The answer is monthly recurring revenues!
Why are one time payments bad?
As a WordPress plugin developer, I learned that plugins distribution dependent on 4 main traffic sources:
- Search / SEO
- WordPress Repository
For the sake of the example, let’s assume that most of your new users are coming through the .org repository channel. Let’s say that WordPress.org suddenly revamps its directory design (which happened a month ago) and search algorithm, which causes your plugin to lose 50% of it’s exposure. If you’re selling your premium plugin with a one time purchase it means that you just lost 50% of your monthly sales from your main revenue stream. Will you be able to pay your mortgage for the next few months? I hope so. And what happen if you have employees? How would you pay their salaries?
However, things are different when you are running a recurring revenues business. Even if a giant asteroid hits earth, and your natural traffic disappears, you are still going to earn the same amount of money as in the previous month. Of course you need to incorporate the churn rate into the equation, but at least your business have some buffers and its not going to suddenly die in one day. One time payments are very risky!
Adding recurring revenues to your monetization model is like adding a capacitor to your electronic circuit.Tweet
So yes – you might say that some customers won’t like the automated renewals, and you’re probably right. I hate chasing after my credit card company disputing **unauthorized** payments. BUT if you are designing it right, by being transparent during the checkout process, highlighting the fact there are recurring revenues involved, sending a notification email a week before the next payment with a very simple link to cancel the payments account, then you’re pretty much good and I am sure that your conversion rates will not be significantly affected (if at all).
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Why are monthly recurring revenues also good for your users?
– Based on the amazing research Thomas Höfter has recently published about WordPress premium plugins pricing statistics, an average annual premium license is about $125. From the consumer point of view, it’s much easier and less risky to pay $10 to test drive the premium version for a month, instead of making a big commitment by paying the whole $125.
– You add flexibility and let users use your premium plugin features even if they need it just for a short period (e.g sites build for one time events).
– Most of your customers are SMBs (Small/Medium Business) who use your plugin on their companies site, and the last thing they need is to forget do the manually license renew and take a risk to miss your latest security patch. They are running a business, and they are swamped with other 100 stuff. The auto-renewal only makes their life easier (more accurately – doesn’t make their life harder ;-)).
Examining the numbers…
The average license renewal rates for products without auto-renewal in place are between 10%-30%, while products with recurring-revenues / auto-renewals have renewal rates between 60%-95%. Of course the businesses with auto-renewals have more refund processing and charge backs (the numbers depend on your product and how well you remind your customers prior to the next payment to prevent surprises). But as you can see, the different is at least 30% in renewals–usually more like a 50% difference. That’s a HUGE difference in the long run.
Adding license auto-renewal for your WordPress plugin will increase your renewals rate to 30% to 50%.Tweet
If you are still not convinced, here is a compromise that you’ll might like. If you want the best of both worlds by continuing with one time payments but on the other hand “kind” of doing recurring revenues, you should add an opt-OUT checkbox for automatic renewal. Most of your customers, hopefully, won’t opt-out, but the ones who really care about it will have an option to do so.
Hey, don’t listen to me – listen to Matt Mullenweg, because not having auto renewals is just “silly”
Listen to Matt Mullenweg – add auto renewals to your WordPress plugin now, because not having auto renewals is just “silly”.Tweet