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Navigating the Move to Subscription Licensing and Recurring Revenue Models

May 19, 2016

Navigating the realm of software licensing in the subscription services age can be a tricky prospect. Traditional licensing models are no longer practical or relevant and a migration from perpetual to recurring revenue models is now underway. This shift raises a number of questions from companies trying to capitalize on this new way of conducting business.

Flexera Software specializes in software licensing and monetization and the company routinely gets some common questions about the shift to a subscription model. A recent blog post discusses some of these recurring questions and offers advice about how companies can glean the most value from enterprise subscription licensing.

According to research from IDC (News - Alert), subscription revenue from software will reach $130 billion this year, growing at a whopping 21 percent over last year. This is largely being driven by enterprise customers moving away from capital expenditures on costly premise-based equipment toward OPEX (News - Alert) and services-based consumption in an effort to curb costs and take advantage of the cloud. Outside investment is also driving the trend, as predictable recurring revenues derived from the subscription licensing model are a solid bet from an investment standpoint.

But the shift to the subscription model raises a number of questions, including how long it will take to realize an increase in revenues when making the switch. According to Flexera, companies can expect to break even in roughly three years. However, since enterprise customers are generally spending less upfront with subscription licensing, many will purchase additional services, thereby increasing revenues.

Another common query concerns the financial impact of subscription licensing and a potential loss of revenue, at least initially. Companies moving to a subscription-based model can expect to receive one third or less of upfront fees versus the traditional large upfront licensing model. Flexera suggests mitigating losses by slowly introducing subscription pricing while simultaneously offering perpetual pricing. The result will most likely be an increase in overall subscriptions, which should offset the long-term losses from upfront fees.

Finally, many companies specializing in hardware with software making up a smaller portion of business question if subscription licensing is the right fit for their business model. According to Flexera, the move to subscription licensing enables these vendors to lower their hardware prices while making more money on software and services subscriptions.

The shift to the subscription licensing model doesn’t have to be difficult and disruptive. By making small, incremental changes, companies can derive the most value out of the subscription model while also passing along benefits and savings to their customers.

Edited by Rory J. Thompson
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