Subscription Licensing - Who Really Benefits?

March 6, 2017 Caitlin Bauman

Cloud software or SaaS products are no longer vaporware. Not unless you’ve just come back from your extended vacation in Mars. Things for the rest of us here at Earth have changed significantly over the past few years with regards to how software is licensed. Engineering software has been a laggard, but thank goodness we have made the leap too. With the proliferation of cloud software, but not necessarily limited to it, a new licensing model is becoming increasingly accepted in the marketplace viz. Subscription Licensing. But the jury is still out regarding whom this form of licensing really benefits - the consumer or the software vendor? Let’s try and break it down.

Let’s start by defining what a subscription license is. A subscription license enables a customer or buyer to “rent” software. It is usually done over a contract period (monthly or annually are the most common). This is a new licensing concept to most people who are used to buying a license outright (also referred to as perpetual license).

Subscription licensing can be very beneficial for a buyer. First, subscription license costs are significantly lower than perpetual license and users benefit from the low upfront cost. Secondly, the risks are lower. If you don’t end up liking the product you can always choose to cancel the subscription when the contract expires. Companies that offer subscription software know this, which is a big motivator to make sure their buyers are happy with their product. This is also a big reason why maintenance is almost always included in your subscription, whereas with perpetual licensing there is a separate, but optional, annual maintenance charge (typically 16-20% of the upfront cost). Third, subscription licensing allows buyers to account for the software differently. This is because you will be looking at your software as an operating expenditure (OpEx), rather than a capital expenditure (CapEx). So instead of the purchase being a huge lump sum asset, it can be seen as just an ongoing cost to run the business that’s paid monthly.

So much for the buyer. But software vendors clearly haven’t turned more charitable suddenly. Then why do this? For starters, it allows the company to benefit from predictable and recurring revenue streams, as long as they keep their customers happy. And if they keep the customers happy, they have a better chance of extending their contracts and up-selling their product. Recurring revenue from the older perpetual licensing model is not predictable since maintenance is optional and people might choose to continue using older version of the software and not upgrade. In case of subscription licensing, you don’t pay, you can’t use. Being able to predict a recurring revenue stream is something that Wall Street loves too.

What is not often discussed is how much the subscription license costs the buyer over the lifetime of software usage. Since most software vendors consider an amortization period of 3 years to come up with their software subscription pricing, what it effectively means is that if the user continues to use the software beyond that period, it works extremely beneficial to the software vendor. If you are a perpetual licensee used to paying annual maintenance, it is very likely you will now be paying twice as much, if not more, to get on subscription. So it’s a much easier endeavor for a new software vendor to offer subscription licensing than it is for an existing vendor to move their perpetual licenses to subscription. Just ask any CAD executive who needs to field questions from Wall St. analysts every quarter! Making the transition from perpetual licenses to subscription is not easy for software vendors. Companies have to tide over lower revenues in the short term in anticipation of higher recurring revenue stream in the future.

So, back to our original question. Who do you think subscription licensing really benefits? Like we said, the jury’s still out on that.

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  • Dal Din

    I like it

  • Global Nettech

    Thanks for this post.It gives a clear insight about the who get benefits from subscription licensing of software.

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