Is Software Pay-Per-Use More than Just Another Software Licensing And Pricing Model?

It’s common to view “pay-per-use”, “usage-based licensing”, or “consumptive licensing” simply as an alternative approach to deliver and consume software licenses. In a pay-per-use or usage-based licensing (and pricing) model, only software that is “used” will be invoiced back to the customer. The metric for “usage” can vary by the particular software and how it is used. For example, software used to process insurance claims might be purchased by the number of claims processed in a month. Mobile software used by field service personnel to access a hosted CRM service might charge based upon the number of accesses within a financial quarter. And the model can further be tuned to be more predictable, like a cell-phone plan where there are certain bands of usage (e.g. 0-100 accesses, 100-200 accesses, etc).

But, there may be a more powerful way to view a usage-based license model that can revolutionize how you market and sell your value proposition. Typically, license models are compared based upon a model of constrained resources. The underlying assumption is that if usage is consistent among the different models, then, pricing can be tuned and compared among the various license models to be price neutral, or, price positive. But, if you consider that the type of license model affects how the software is used, you may come to difference conclusions about the value of a new license model. This is particularly true with usage-based software license models.

One case study comes to mind to illustrate this point. One software vendor sold engineering CAD design software to their large enterprise customers based upon a subscription license model. Each year the enterprise would estimate need and then budget accordingly. In the process of trying to reduce costs, the enterprise customer decided to setup a proof-of-concept with a pay-per-use model, figuring that a lot of the software licenses that were purchased became shelf-ware and hence, lost costs. So, the enterprise CAD design software administrator setup an initial business relationship with the CAD software supplier to pay for software for one fiscal quarter based upon actual usage (the amount of time used, measured in minutes). Since the CAD administrator knew the actual usage from the license server report, they had a “leg-up” on the CAD software supplier who didn’t have that information. The next step was for the CAD administrator to setup a license server with a virtually unlimited supply of software licenses. This allowed the engineers to use the software licenses whenever they wanted. Over the course of the quarter, the usage was gathered in a report and discussed with the CAD design software supplier.

What happened next surprised everyone. With the new license model in place, the design engineers realized that they didn’t have a constrained amount of software licenses that they had to carefully share. With this new found bounty of licenses, engineers started to use more software, much more software, as they learned how to perform much more extensive design analysis. The engineers developed new design processes for creating and analyzing designs. The end result was that the products designed as a result of using this new design flow reached market much faster than before, leading to a measurable benefit to the enterprise. The CAD administrator was in a bind as the usage far exceeded expectations. In the end, a new arrangement was reached that resulted in a lower price per unit time than was originally developed, but, an overall increase in spend to the CAD software design supplier. In the end it became a win/win and a blueprint for other enterprise deals.

So, before you think of pay-per-use as just another license model and a way to throttle revenue by measuring usage differently, think of new ways to generate much more revenue by enabling new or faster ways for customers to achieve real business benefits. After all, the users of software aren’t in business just to buy software a little cheaper or a little more efficiently, but have real objectives to meet. If you can help them achieve those business objectives more effectively, then your value and revenue should increase accordingly.

Any other ways you can think of that more ubiquitous software access might result in higher market-share capture or customer retention? Can you think of other lessons learned from the case study?

Learn more about how Flexera supports the full software licensing spectrum, including usage-based, trust but verify models that enable you to quickly alter software monetization models across products and tailor models for various market segments and geographies.

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