The Rapid Rise of Consumption-Based Licensing Models

Consumers prefer to pay for what they use; from the electric meter on their house to the gas pump. Software, however, has never followed this model. You buy what you think you’ll need, which could be off by a lot either way depending on business growth or any number of factors. Then there’s multiple usage metrics, license models and schedules. It’s no wonder enterprises have a staff of software asset managers to keep it all organized. 

Yet change is on the horizon. “Every software vendor I talk to is experimenting with a consumption [or usage-based] licensing model in one way or another right now,” says Mathieu Baissac, VP of product management at Flexera, a provider of licensing, compliance management and installation solutions for software producers and enterprises. “I haven’t seen a licensing model adopted so fast in the 20 years that I’ve been doing this.”

Backing up his viewpoint is IDC research that predicts usage-based software pricing models will be an option for 80% of applications by just 2017.*

Any why not? Enterprises, which have more choices in software than ever before, are demanding easier and more flexible licensing from producers. “Enterprises are saying ‘give me more flexibility and I’ll give you something in return, which is to provide my usage data and pay for my fair share,’” says Baissac.

A lot of license noncompliance comes from companies trying to work around inflexible licensing. “Right now customers with more traditional licensing schemes are stopped cold when they reach the end of their licensed volume, so they find ways around the problem,” says Baissac. “Or, they’re allowed to continue using the software out of compliance, subjecting themselves to true-up penalties when the producer comes in and manually audits their software use.

Instead of stopping an enterprise’s use of software after they exceed a particular count or invasively auditing them for compliance, the consumption model allows them to exceed that count (without lengthy negotiations) and pay for it as a set rate. “When the enterprise exceeds its initial licensing metric, the producer can invoice the customer for overage. Typically, in this model, enterprises can view an online dashboard, track their usage, and then at anytime make the decision to exceed their usage limits knowing how much they’ll pay for it,” Baissac explains.

Consumption is not only a potential remedy to a lot of noncompliance, it’s a potential revenue boost for publishers, Baissac notes. “I keep telling producers, you’ll end up making more money by giving customers flexibility,” he says. “There’s a psychological thing that happens to us when we have the freedom to choose, to do what we want; we will end up doing more than we thought we were going to.”

Implementing a consumption licensing model, however, is complex to do manually if a producer were to build their own licensing scheme. Not only is there immense amounts of data to track and house from sources on-premises, in the cloud, embedded, and on mobile applications, but there are huge data security and privacy issues.

Only a handful of publishers, Adobe for example, have rolled out flexible licensing programs. For smaller vendors and start-ups the task is daunting—and ripe for outsourcing.

There are only a few third party companies offering licensing-as-a-service (LaaS) today, but that number could grow quickly.

Flexera’s LaaS platform appeals to very large producers as well as very small, says Baissac, all with a need to offer flexible and value-based licensing models. “One client produces DNA sequencing software and needed a licensing model that charged customers by the number of gigs of DNA sequenced. Another client makes drone software and needs to license by hour and minute of drone flying time.”

The new value-based licensing models are fascinating, says Baissac. “Whether it’s built manually in-house or using an automated third party solution, this sort of flexible licensing is where software licensing is going. Application producers want to focus their development resources on innovating business solutions for their customers, and not on figuring out how they’re going to protect and monetize their intellectual property and license their software in a constantly changing technology environment.”

Join Mathieu Baissac at the Compliance Manager Summit in San Francisco, March 12, for his session on monetizing software. Register at ibsmasummit.com. Registration closes March 8.

* IDC’s Worldwide Software Pricing and Licensing Predictions, 2014.

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