New Shifts in Software Licensing and Pricing

Software Licensing and Pricing

Software is a mature industry with considerable cost pressures. It costs an incredible amount of money to develop, deliver, market, sell and support a software product.

Software vendors are struggling with dwindling margins, increased competition, and bad economy that keep pushing them to sell at lower prices. For many, the only way to overcome that is to make big shifts in licensing and pricing schemes.

Traditionally, most software vendors use a perpetual licensing model, with a license fee for each module or component of the software, or a license fee for each user of the software.

When a customer acquires a perpetual license he assumes responsibility for managing the software. There is a high upfront cost associated with the purchase of the license, as well as the burden of implementation and ongoing maintenance. ROI is often delayed considerably, and, due to the rapid pace of technological change, expensive software solutions can quickly become obsolete. This made acquiring software products a costly investment that many companies cannot afford anymore.

Under all this pressure, the industry started moving away from the rigid and expensive perpetual licensing model toward a new flexible model that allows selling software as a utility. It is also called Software as a Service (SaaS) or Subscription Based Software.

SaaS means that the software is paid for as it is used. The consumer has no software, hardware, or infrastructure to purchase, install, or maintain. Apart from a personal computer and an Internet connection, all parts of the solution are provided by the software vendor. They are hosted on a remote server in a data center managed an owned by the vendor.

In this paper we will compare the perpetual model with the SaaS model and we will discover the benefits and challenges of the new licensing model. And most important, we will discuss how to price a subscription based software.

Perpetual Licensing Model

The perpetual model is the oldest in the software business, you buy a license and you get to use it forever. You then buy a maintenance and support contract each year that covers you for upgrades and telephone support.

The perpetual model use mainly based on “Block Pricing” and “Two-Part Tariffs Pricing”. But also vendors use “Price Discrimination” and “Bundling”.

The following are some of pricing models of the perpetual licensing.

Per User / Named User - This is one of the most common models. It licenses one individual with a single software copy and prohibits the use of it by any other user. Users typically have unlimited use of the product. Multi-user licenses are also commonly available to allow multiple people to access and use the software. However when using this model, users are specifically named rather than allowing a pool of users as provided with concurrent licensing.

Concurrent Users - This provides a number of available licenses to be used at any one time by multiple, unspecified people. This “floating” license allows a number of people to share the software as long as only the licensed number are using it at any given time. This model is typical with server-based software products. Most concurrent licenses do not limit the amount of time or use of the product beyond the number of simultaneous users.

System Based - Used mostly in the database market, this pricing ties the license to a specific type of hardware or subsystem. Vendors price their products based on the kind of processor (CPU) that the software will run on. As the hardware is upgraded (or downgraded), the software license and subsequent price expands (contracts) as well.

Site / Enterprise License - This pricing model provides the entire customer site with unlimited use of the software. Many vendors use this option to generate up-front revenues and reduce the administrative costs of the licensing

Value Based - The idea behind value based pricing is to derive a relative measure of the value of the product to the customer. Some companies price their software based on the cost savings they can demonstrate, or the increased revenues generated by their software. While this model is attractive to customers, it is very difficult to measure and monitor.

Combination - Many vendors combine any two or more of these models while formulating their pricing strategies. For example, some products combine a per-server and per-user pricing model.

Also in perpetual model that are other type of costs charged to the client: Installation, training, maintenance, customization and other services costs.

However there are key problems in this model.

- It can entail large up front costs and annual maintenance fees that can reach 20% of a contract’s initial value (Two-Tariff pricing to capture the consumer surplus)

- Most of the time clients pay fees for modules that they don’t use and for user licenses that they don’t need (Does not use Group Pricing)

- It is hard to keep track of which user holds which license if you have many different kinds of software. So when people leave, the software is often abandoned and unused, and the money paid for the license is wasted.

- The clients will have to spend a lot of time and money to upgrade their software.

Those are evidences that there is a large gap between the cost of software and its value to the customer. In a survey that IDC did, fewer than 20% of users say they are using full advantage of the software they licensed.

Software as a Service вЂ" Subscription Model

How it works

Software as a service (SaaS) is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet.

Software vendors will provide the hardware and the infrastructure to run the software. They will also provide support and upgrades as part of the plan, so companies don’t have to worry about whether or not they should purchase new versions of software to replace a large number of perpetual licenses.

SaaS is becoming an increasingly prevalent licensing model as underlying Web technologies mature and new developmental approaches become popular. Meanwhile, broadband service