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Top 3 Software Licensing Models

This article discusses the Top 3 Software Licensing Models – subscription license, perpetual license and consumptive license.

Software customers and publishers negotiate pricing based on both the perceived value of the application and how the application will be used.  The software licensing model defines how the product will be used.  Let’s define the top 3 software licensing models.

Perpetual license – a non-expiring license to use an application. The customer has no obligation to pay for support or update services.

Advantages: Simple to deploy and manage. Customers may be able to expense the purchase as capital.

Potential downside: Difficult to securely handle machine upgrades and software redeployment. Publisher is locked into the old license policy for years.  Customers may end up using very old software versions to save money if they elect to forego maintenance.  This in turn could lead to poor publisher reputation when software becomes outdated. For the customer, perpetual licenses require larger initial outlay.  For the publisher, perpetual licenses require a steady stream of new license sales to maintain revenues. Pressure to discount is high.

Subscription license – a renewable license, usually annual, including software support and updates during the coverage period. The license is automatically terminated unless it is renewed.

Advantages: Encourages steady, predictable revenue flow to publisher. Lower initial cost for the user, faster approval cycle. Allows for short-term rentals. License policy can be changed at renewal time. Limits license exposure to overuse when machines are decommissioned or upgraded. Customers are able to annually expense the budgeted license renewal fees. Less price discounting pressure. Encourages on-going client-vendor relationship.

Potential downside: Increased license management overhead. Requires accurate record keeping to manage license life cycle.

Consumptive license – This license has a periodic fee based on usage. Payment can be before or after use. Example cases: overdrafts, utility-pricing based on time or work done, etc.

Advantages: Maximum license and pricing flexibility. Price most closely related to value. Encourages steady revenue flow to publisher. Lowest initial cost for the customer. The customer is never denied a license.  License policy can be changed at any time. Customers may be able to expense the license fees as they occur, perhaps monthly. Least price discounting pressure. Encourages on-going client-vendor relationship.

Potential downside: Requires most license management overhead. Reliable license usage reports must be created periodically, and mid-cycle to check against budget. Licensing must be integrated into CRM or accounts receivable systems. Customers may have issues with privacy.

2 comments

  1. Paul Britton says:

    Of course the nice thing is that you can mix and match: we use permanent licenses in the perpetual model, but they are linked to a release version of the software, which is built into the license. Subscribers get renewed licenses as we release new versions whereas non-subscribers don’t. We also issue expiry licenses for evaluation or lease models.

    One other downside of a pay per use model is that you are encouraging your clients to minimise use to save money – whereas the costs are built into development rather than use, so the way the product is used doesn’t reflect the cost of production.

  2. staff says:

    Thanks for your comments, Paul.

    As far as the downside of pay-per-use, I agree. However, another way to look at it is that
    this license model can cause customers, who would not be willing to pay a perpetual or
    subscription price for your product, to be able to use it and generate revenue for you.

    We think of it like rental cars: when you travel to another city, you aren’t going to
    buy a car, but you might rent one for a day.

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