The decline of the perpetual software license

Recently, Apple announced a new subscription service where customers pay a recurring monthly fee to get an annual phone (hardware) upgrade.

Likewise, all Autodesk software will be available by subscription only starting August 1, 2016. These announcements signal yet again that the market dominance of perpetual licenses is waning.

In fact, according to a new study from Flexera Software, today 26% of producers say that all their revenue comes from perpetual licenses. Within two years, this figure will more than halve to 14%. 61% now say that half or more of their revenue comes from perpetual licenses. Within two years, this percentage will fall to 54%.

There are several reasons for moving away from perpetual licenses. Organizations increasingly want to align the cost of their investment in software assets with the benefits achieved – and a perpetual license model does not make this task any easier. Perpetual software licenses require higher upfront costs – before the software has proven its value to the organization.

As the subscription model grows in popularity, app developers and producers need a clear definition and comparison of software monetization models. They must also understand the business case for adopting or adding new models. Finally, they must realize operational considerations and impacts. In fact, software producers can implement a variety of licensing models encapsulating different strategies for monetizing their software. There are hundreds of different types of software licensing models. Here are some examples :

  • Subscription license: A subscription license allows purchasers to rent their software for a contractual period, rather than purchasing the license outright. Offerings, such as Salesforce.com, are examples of subscribed to hosted or software-as-a-service (SaaS) based software. One can also purchase on-premise software using a subscription model. Subscription licenses also typically include the right to new software releases and basic technical support for the term of the subscription.
  • License based on use: Usage-based licensing allows organizations to “pay as you go” based on a certain metric of consumption. This metric can be based on the number of software accesses, disk speed or capacity, or the amount of data transferred, to name a few. Like subscription models, usage-based models allow companies to closely align costs with usage.
  • Capacity/Infrastructure: Software vendors also frequently price software based on company capacity or infrastructure. For example, a license may be tied to the size of the server on which the software resides (i.e. the number of cores, processors, or sockets) or the type of machine. This data is then converted into points, which are associated with costs. This model helps make software more affordable for small businesses or those managing smaller infrastructures, with costs increasing as an organization scales.

According to research from Flexera Software, the subscription licensing model is on the rise. Today, only 14% of producers report that half or more of their revenue comes from subscription (SaaS-based) licenses. Within two years, this figure will increase by half to reach 21%.

The lure of subscription licensing

There are many advantages for producers who offer subscription licenses, as long as they can manage the disadvantages. On the positive side, subscription software often generates revenue growth and predictable, recurring revenue streams, which in turn translates into stronger company valuations. Assuming the software delivers significant value, customers will continue to subscribe to the solution over the long term, resulting in more predictable and sustainable revenue into the future.

Additionally, subscription models tend to require lower upfront costs, which can be attractive to companies that prefer to tie software costs to actual usage and value over time, rather than pay the full cost immediately before the software has proven itself. So customers who wouldn’t otherwise have purchased a perpetual license can spend money on a subscription. A more flexible pay-over-time approach may appeal to companies with a big appetite for software but a limited budget for perpetual licenses. The subscription licensing model allows for broad and deeper penetration of your software for a given annual budget.

Additionally, with lower upfront costs and the built-in ability for customers to discontinue the subscription once the term expires, customers are less likely to purchase software. This can reduce the pressure on producers to offer discounts on their software.

These benefits are available to any producer who can successfully transition from a primarily perpetual licensing business model, or add subscription licensing models to the licensing portfolio. But managing this transition can be tricky. Bringing subscriptions into the mix requires business process changes. This can be a cumbersome and inefficient process if the software producer develops their own in-house software license and entitlement management systems, as there is usually a lot of overhead involved in maintaining and modifying software licensing systems. local licenses. Implementing commercially available software monetization solutions would greatly ease the transition and provide flexibility and agility for producers who need to implement a new licensing model – subscription or otherwise.

Finally, producers need to think about their revenue models. Revenue is recognized over the term of the subscription license. Bookings are immediate and a backlog of revenue builds over time. This means that initial revenue certainty will not be clear until renewal rates and the sales pipeline stabilize after the transition to subscription licensing.

The shift from perpetual to subscription licenses is inevitable, reflecting the changing preferences of enterprise customers. Adding a subscription-based software licensing model can provide producers with significant value in terms of new revenue and market expansion opportunities – as long as producers are able to manage the transition from a software monetization.

Cris Wendt, Principal Consultant at Flexera Software

Image source: Shutterstock/Sergey Nivens