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Flexible Software Licensing Models Set to Take Over

by David Burkett, Mar 29, 2017

The IDC predicts that by the end of 2017, all organizations will have a migration plan in place to shift spending from perpetual software licenses to subscription-based pricing. In a tech focused society, most of us rely on a variety of digital devices to access applications. As a result the traditional software licensing method, which involved driving to the nearest tech store, purchasing a CD with your desired application and downloading it is now considered outdated and irrelevant.
These perpetual, on-premise licenses could theoretically last forever but as we all know, computers have an expiry date. With on-premise licenses fading and SaaS solutions becoming the norm, there comes an influx of new software licensing models. Not to be underestimated, software licensing is fundamentally important for the commercial success of any software.

Subscription Based Software Licenses

The subscription based model is the most popular amongst software vendors. This model allows users to purchase a subscription for a defined period of time (generally on a monthly or annual basis). This licensing strategy is a perfect fit for SaaS solutions. There's a very good chance you own software that's offered on a subscription basis. Take Microsoft Office as an example. It has altered it's licensing strategy from perpetual, on-premise licensing to a subscription model.

Usage Based Software Licenses

As the name suggests, this licensing method charges users based on their consumption. Users can see the allure of this model as they only pay for what is being used. The initial challenge is defining your price points - what will you track and what level of consumption before a user enters the next pricing bracket? It's very difficult to implement a usage based software license before any data regarding users consumption is collected.

Performance Based Software Licenses

This relates licensing to value. In a way this model relates to usage based licensing but it differs in that users will pay for a certain outcome - for example, the amount of invoices generated or the amount of whitepapers downloaded. Pricing based on value is an attractive option for businesses/users that are unsure of their future performance. However as these businesses become profitable, they become victims of their own success which may see them switch to a software provider with a different licensing model.
These new, flexible license models are better serving the modern user. On-premise licensing provides little value to someone with two laptops, a mobile phone and tablet. There's no right or wrong licensing approach. Ultimately it comes back to the software you're offering and how users will interact with it. It's also important to know that you're not locked into one licensing model, you can create a hybrid model or switch between strategies (as Microsoft has done) over time. As you collect data about how users are interacting with your software, you'll be better equipped to make a decision on your licensing strategy.