As cloud applications, based upon SaaS delivery models, continue to show significant growth, many application producers are taking a step back and asking: How can we achieve the desired business outcome of driving predictable recurring revenue streams given our mix of legacy and new cloud-based solution offerings?
And an even bigger question: Are there flexible software monetization models which can help us derive maximum business value from existing solutions and customers—while setting the stage for the next round of solution offerings?
Do subscription licensing models cause revenue dips? No, a subscription license model is typically added to a portfolio of models to address new market needs, and doesn’t replace the perpetual revenue stream.
Three important preparations:
- Add, don’t flip to subscription license models
- Align compensation with the desired outcome
- Culturally prepare for a new revenue recognition process
Perpetual licenses, the traditional software monetization model, continue to be a dominant model and have served the industry well. However, with the growth of SaaS and cloud, many producers are adding subscription licensing models into their existing go-to-market strategy to create predictable and recurring revenue streams.
In fact, many industry analyst reports, as well as software licensing and pricing surveys, show that perpetual licensing revenue is on the decline and subscription licensing revenues are on the rise and will continue to increase as technology shifts to SaaS and the cloud. In some cases, entire software vertical markets such as Electronic Design Automation (EDA) standardized on the subscription license model in the early 2000s, after several years of limited releases to the low and high end of their markets.
This white paper will offer insight on how application producers can introduce a subscription model into their software monetization strategy to maximize revenue generation and offer customers a compelling experience. Topics include:
- Definition and comparison of software monetization models
- The business case (and a myth)
- Pros and cons
- Operational considerations
Definition and Comparison of Software Monetization Models
Monetization models for software applications typically include the following, each one designed to meet a different customer need:
- Perpetual: most common, pay once and unlimited use, revenue hits P&L when the order is booked. Maintenance, which typically includes technical support and the right to software updates, is usually priced as a separate item. This is the classic license model behind most software. This model was largely based upon a paradigm of thinking of the software license as a physical good that is purchased once and used forever. But, if you conceptually think of software as a service (not to be confused with SaaS), you can become more creative in matching your “service” to the way it is purchased and consumed. As a result, some of the models below are becoming more popular.
- Subscription: fast growing, highly flexible, and where revenue is recognized based on a regular schedule (monthly, quarterly or annually) to reflect the delivery of value over time (e.g. the stream of maintenance updates). The subscription license is usually based on an annual or bi-annual term such as 1, 2 or 3 years, and includes the right-to-use the software and support. If a subscription license is not renewed at the end of the term, then the customer loses the right to use the software and maintenance rights.
- Rental (or Term): This is similar in concept to a subscription license in that the right to use is temporary. With these licenses, maintenance may or may not be included. These are typically designed for peak usage needs, such as a 1 month license. This allows for the delivery of a license to meet a short-term need (e.g. tax software during tax season), without discounting a subscription or perpetual license to meet the customer need.
- Utility (pay-for-use, pay-for-burst, pay-for-overage): fees are based upon actual usage (i.e. water or utilities for a home, cell phone) and revenue is recognized periodically as consumed and paid. While this tends to be the least used of all of the models, it is gaining momentum in cloud and SaaS based applications. In fact, IDC predicts: “Usage-based software pricing models will be an option for 80% of applications by 2017.”
While perpetual license models are still most common, many application producers have a hybrid mix of subscription, rental, usage and traditional license models to meet different market needs.
Subscription Licensing Model Business Case
Subscription software license models bring several benefits to software producers and intelligent device manufacturers, including revenue growth, predictable and recurring revenue streams, flexibility to meet customer needs and easier adaptability to pursue new markets or market segments where the large up-front cost of a perpetual license may not resonate with customers.
Greater Monetization Opportunity
At first glance, it might appear that a perpetual model offers a higher revenue stream because of more immediate revenue recognition. However, the long-term reality is different. After 3 to 5 years, the models hit a crossover point where subscription revenue exceeds perpetual results. It can be compared to the amortization of physical goods like computers. The pricing of a subscription license model is described in greater detail later in this white paper.
Increased Flexibility to Meet Customer Needs and Pursue New Markets
While revenue certainly plays a big role in a decision to add a subscription model, customer and market needs play an equally important role. Because of their flexibility, subscription models can be adapted to different customer and market needs. Examples include:
- More flexible pay-over-time approach can appeal to large accounts with a big appetite for software but a limited budget for perpetual licenses. Large accounts may need a wide amount and variety of software to get their job done. The subscription license model allows a wide and deeper penetration of your software for a given annual budget. This may allow you to fortress your customers against “point tool” providers because your software is easier to buy.