License to Subscription Model
Neely Shachal, Marketing, Synthesis Systems
Perpetual Licensing is not Perpetual? Welcome to the Subscription Model.
Software, of any kind, paid or free, comes with some sort of license. In the past, the way to purchase a software product was primarily through perpetual licensing. The process seemed simple – you paid for the software upfront and got to use it for as long as you wanted. However, this popular perpetual licensing model is slowly disappearing.
The reason? Technology is changing so quickly that customers are not willing to wait a year to get the next upgrade, nor are they willing to spend extra for the updates. This, along with agile methodologies, frequent product releases, and the cloud started to push enterprises toward moving from a ‘software as a product’ mindset to a ‘software as a service’ model. Software licensing generated many different models, one of which—the subscription model—is rapidly gaining market approval.
With big names such as Salesforce.com, Microsoft Office 365, and Adobe paving the way for others to follow, the software licensing landscape seems to be in a massive transformative phase.
The big question is – are you ready for the subscription-based model? How do you transition? What are the benefits? Let’s take a look at that.
Perpetual Licensing and Subscription Models Explained
What is perpetual license?
“A perpetual software license is a type of software license that authorizes an individual to use a program indefinitely. Generally, outside of termination, a perpetual software license allows the holder to use a specific version of a given software program continually with payment of a single fee.”
What is a subscription license?
“A subscription-based pricing model is a payment structure that allows a customer or organization to purchase or subscribe to a vendor’s IT services for a specific period of time for a set price. Subscribers typically commit to the services on a monthly or annual basis.”
Definitions by Tech Target
Perpetual licenses are the conventional way of acquiring and owning software. It involves an initial, upfront cost which includes the right to use the software for an indefinite period, minor updates, and technical support. The user does not have to pay anything additional to be able to use the software for the foreseeable future, except when they want to upgrade to a newer version.
Subscription-based licenses, on the other hand, can be best explained as ‘renting’ software under a monthly or yearly licensing model, where access is granted in return for recurring payments. The users, in this case, do not own the software license but they are entitled to use it only as long as their subscription lasts. The subscription fee allows them access to all the updates, support, and newly released versions of the software.
It’s no secret that the pricing and licensing models are now redefining how software is sold, bought, and consumed. As the subscription model becomes more prevalent, companies are looking for unique strategies that help them stay profitable while maintaining long-term customer relationships. Many innovative models have been created, such as Amazon Web Services, which charges the users by data storage and gigabytes. Some other rapidly emerging models that seem to be popular these days are:
- Monthly/ yearly Licenses (Office 365)
- Pay-as-you-go (Microsoft Azure)
- Feature-based (ISVs such as Siemens)
- Pay-by-Instance (popular with IaaS and PaaS)
The shift from Perpetual Licensing to Subscription
Why is it happening?
Apart from technology (predominantly cloud solutions), innovation, and changing consumer preferences, there are several other factors propelling the shift towards the subscription model. On the business side of things, the sooner organizations receive the returns on investments, the better. Perpetual licenses require higher upfront costs, which means there is a need for much higher capital expenditure (CAPEX), while the operating expenses (OPEX) remain lower. A subscription model, however, requires a lower CAPEX and a higher OPEX, which helps companies reduce their upfront costs by spending only on what is needed. Financially, they find themselves in a better position to predict expenses as well as revenue.
Some other key driving factors are:
- Easier and more effective license management
- Cost-reduction of subscription model in terms of customer support
- Scalability (businesses only pay for the actual number of users)
- Identification and creation of a more solid customer base
- Generation of recurring revenue
IT environments have evolved over the years, so perpetual software models are becoming less common. Yet, with the technological shift to the cloud, licensing has become extremely complicated. Culturally, we are moving toward the subscription model—something that is being felt in almost all industries—even though the software licensing market is in a transition phase. It is being driven by a need for greater pricing predictability, transparency, and flexibility.
Today, as perpetual licenses are becoming less feasible, many corporations have shifted to the XaaS model. In fact, Gartner predicts that by 2020, all new entrants and 80% of traditional vendors will switch to subscription-based business models. It is difficult to say whether perpetual licensing will disappear altogether or not, but the rapid growth of XaaS is compelling the likes of Microsoft to adopt the subscription model.
Challenges to consider during transition
For software companies traditionally selling perpetual licenses, switching to subscription licensing can be a challenge. A subscription model can give businesses access to a recurring stream of revenue, create new growth avenues, and so on. Transitioning to an entirely new billing model requires sustained efforts and a deep understanding of a product and how it can translate into the as-a-service model.
At its core, when a business moves to a subscription model, it is the product and the way it is sold that needs to change—not just the pricing. This will require an organization to rethink how it optimizes its salesforce.
The company will have to shift its focus to its consumers and not be driven solely by financial gains. Every role in the organization will have to change, with the most challenging aspect of managing the cultural shift. The whole team – be it product development, marketing, finance or support – will have to work together to optimize customer lifetime value and achieve optimal profitability.
Examples of companies that have successfully transitioned
Some of the biggest names in the tech industry have either already converted to XaaS or added it in some form to their core products. Let’s take a look at some of the companies that have profitably managed this change.
Microsoft moved its productivity suite to cloud in 2011. Known as Office 365, it offers the same tools as the desktop version. Even though it is the world’s largest provider of enterprise XaaS solutions, Microsoft has not completely forgone perpetual software. Microsoft Office can be purchased as stand-alone software and volume license deals, allowing users more flexibility of choice.
Adobe reinvented itself when it went from a perpetual software business into a cloud-based service in 2011. Unlike Microsoft, it offers its desktop creativity software (Creative Cloud) only through subscription pricing.
Intuit develops and sells financial, accounting, and tax preparation software and related services for small businesses and individuals. Its flagship products include Quicken, QuickBooks, TurboTax, and Mint which were converted from licensed software to software-as-a-service.
Automatic Data Processing, Inc. (ADP)
ADP is among the world’s best-known human resources management software and service providers. It offers payroll management, human capital management, and similar services through cloud.
Approach plan for transitioning
If your organization is contemplating making the switch to the subscription licensing model, there will be many things to consider. Every business has its framework and offerings, so strategies need to be adapted accordingly. As a general guideline, here’s what a company should do to get started:
- Planning and Communication is Crucial
This will be a massive transition that will have an impact on every role in the organization – right from the shareholders to customer support. Meticulous planning and effective communication about the transformation plan and approach, the impact it will have on everyone, and so on will be vital to ensure that everyone brings their A-game during the transition phase.
- The Pricing Model
It has been said time and again that the subscription model is not merely about altering the way businesses charge their customers. Organizations need to carefully determine how their product can be offered as a service. This requires a detailed understanding of the customer base, their needs, and what the product/service can offer to them.
- Align the Organization Structure and Optimize your Workforce
Managing a subscription model requires different skills than managing the perpetual licensing model. You may need more expertise to deal with the increasing focus on technology, delivery systems, and customer support. The demands on a XaaS organization are vastly different from that of a perpetual licensing product. The need for fast upgrades, quick response times to the customers, and large changes in pricing models and user experiences requires you to rethink your organization structure too.
- Timelines and Defining Roles
Once an organization is clear on what it needs to do kick-start the transition, the next step would be to prepare a timeline of how things are going to pan out. Having a well-defined roadmap fills in the blanks, making it clear what to expect in the future and what is expected of everybody involved.
- Be Prepared for Uncertainties
With a significant change like this one, it is natural to expect positive results, but essential to maintain a practical outlook. Such a significant transition cannot be without hiccups. There will be unexpected challenges and maybe even initial financial losses; but the only way to get through them is through patience and focus on the long-term goals.
When it comes to the subscription versus perpetual license debate, there is no precise way to say which one is right or wrong, as both of the models have their perks and drawbacks. It ultimately comes down to the desires of your customer and the flexibility of the organization to adapt to the changing needs. Even with all its complexities, XaaS is undoubtedly taking over as the future of software. Most probably, your competition is already set to launch the subscription model if they haven’t done so already. For any organization considering upgrading their business model to subscription, know that now is the time to do so.
Talk to our experts to find out if your business is ready for the subscription economy. If you have already made inroads into the subscription world, know how you can enhance your customer value.