Featured Article from Software Licensing

Down with the Perpetual License, Up with the Subscription

November 30, 2015

The dominance of the perpetual license is fading away. Where businesses used to ask for years worth of money up front, they now only ask for a month at a time. Although this sounds like it could allow business revenues to become more unpredictable (and to a point, it does), consumers and business clients have shown that they prefer paying as they go. And the market has listened.

In a recent blog post from IT Pro Portal, a study from Flexera Software was mentioned that supports this claim of the fall from grace. That research notes that about 26 percent of product producers gain all of their revenue from perpetual licenses. Those researchers also predict that the percentage will drop by about half, to 14 percent, in two years. Furthermore, of the 61 percent of businesses that say they gain at least half their revenue from perpetual licenses, they too are expected to decline to about 54 percent by 2017.

What does this mean for how enterprises will conduct business? If they aren’t gaining revenue from perpetual licenses, they must be gaining their cash from some other method of play. In fact, it appears they are gravitating toward subscription licensing, usage-based licensing, and prices based on capacity and infrastructure.

First, subscription licensing is the modern equivalent of renting a product – even if that product is a cloud-based such as a database or contact center platform. Usage-based pricing also takes advantage of the fact that enterprises may only need a certain set of capabilities or services for a limited time. Charging for capacity can also make its way into subscriptions because some database vendors, for instance, will allow complete access to software but only a limited amount of processing power or storage for any specific price point.

Tied together, these methods of pricing could be referred to as subscriptions. This has a lot of appeal for enterprises, first and foremost, because it allows them to try new products without a years-long commitment. They can test a new database at the cheapest pricing tier and make sure it works for them. If they are impressed, they can continue to purchase further months of use and expect to receive software upgrades as part of their patronage.

Service providers will need to navigate through pricing hurdles, however, in order to keep themselves afloat. On the plus side, they can refrain from lowering total subscription costs as introductory offers because they will not expect customers to purchase a year or two of services. Instead, they can keep monthly costs at a reasonable rate.

Even with a slightly-inflated monthly rate, the price point of a service can only work if customers continue to purchase month after month. This places a burden on organizations to keep their products working well at all times and offering exceptional support when errors to occur. In the end, this should create better software for all involved because service providers will always have that knowledge of needing to keep pace with customer expectations.

Edited by Maurice Nagle
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