While rarely getting public attention, Adobe, the maker of Photoshop and many other software tools, has been one of the great success stories in the technology sector in recent years. For perspective, its stock price was in the $45 range as of four years ago and today it trades for roughly $145. How did it do this? By wisely jumping on an important technology inflection point and overhauling how it provided customers its products.
Specifically, in the past, Adobe had traditionally offered their products in boxes containing the software on CD’s. The customer used it until there was a new version with some new features they were interested in. Adobe charged a fair amount for their products since the customer may use it for a long time. For example, the Adobe Creative Suite, their flagship product, was priced at $2,600.
About four years ago, Adobe began offering their software as a subscription service, with the software sitting out on the cloud (an Adobe server accessible via the internet). Making software applications available that way was a fairly new idea four years ago and Adobe jumped on the trend early. The Creative Suite mentioned above was made available via a service they call Adobe Creative Cloud, and a 12-month subscription was, and is today, $50/month.
The advantage for the customer is low cost and the fact that Adobe puts new features in the product all the time so you can benefit from them immediately, versus waiting for a new version with the features, and paying $2,600 again. The advantage for Adobe is a more predictable stream of revenue via the subscriptions, with none of the big spikes and low troughs associated with a bunch of customers buying a new version when it is released and then not buying again for 4-8 years.
To find out the consumer appeal of this new approach, Adobe tested it in a small market; Australia. Aussie customers loved it, and the financial results in that market matched Adobe’s goals.
Stepping back, Adobe did what good leaders do:
1.) Get out in front of key inflection points – Not doing so will lead to mediocre performance versus how competition may be doing things, and eventually the possibility of facing extinction!
2.) Look hard for ways to test the impact of the changes prior to making a full commitment – Such testing efforts are vitally important in trying to avoid a big mistake and wasting a lot of capital on bad ideas.
Adobe has fully implemented their subscription service model and the payoff has obviously been impressive. Net, learn from the Adobe story; the alternative is to eventually get run over by competition!