As we are seeing subscription-based software license models ‘rule the world’, one might wonder why they are that successful. And we need to ask the question if they are truly in the interest of customers.
Who profits from the rise of subscription models?
A major driver of course has been the rise of ‘software as a service’ which natively involves permanent cost of hosting and operation by the software company on behalf of the customer. Previously, with on premises software, hosting and operation was entirely covered by the customer. Shifting this workload to the vendor ‘cried’ for a different pricing model and, voila, subscription models were ‘born’.
For software companies, there seem to be more advantages to this model and a major one is an increased license revenue. When you compare subscription and perpetual license prices and include support and maintenance, you will find a breakeven mostly at around 3 years. After year 3, perpetual licensing becomes less expensive (given subscription customer loyalty beyond the 3 year threshold, of course). So, if you as a software company keep churn low, chances are you will make more money from year 4 onwards. However, nothing is like it seems and this seemingly higher revenue, only plays a role assuming a shorter lifetime value of a typical subscription buyer. Because keeping churn low in the subscription business is a challenge.
But there is more. New customer business with perpetual licensing can be very volatile and hard to predict. When your software business generates 25, 50 or 80% of revenue from new business sales (the rest would be up-sell and support contracts), it becomes highly unpredictable. And that is something investors, your CFO and shareholders don’t like at all. Volatility and risk are bearable for entrepreneurs only. Subscriptions offer a much smoother ride. Ruling out an unlikely sudden spike in customer churn, volatility would be low and your subscription revenues stable and ideally growing steadily. Which in the end might be considered a good thing because a stable vendor is in the interest of customers, too.
But how does this look from a customer perspective? There are three major benefits in my eyes:
- It is easier to onboard a product as the initial (and upscale) investment will be OPEX only (operational expenditures) and thus much lower
- A subscription usually allows for ‘breathing’, i.e. if you for instance need less user licenses, downscaling is possible and leads to lower OPEX costs. Some companies even allow downscaling within a subscription term which makes this even more attractive.
- Pure OPEX costs usually allow for immediate deprecation, instead of multi-year deprecation like in the case of perpetual licenses. This could be considered a benefit depending on how your company operates financially.
And naturally for a SaaS solution perpetual licensing is not practical at all – our own SaaS product SIGNL4 is no exception and is of course based on a subscription model.
The many benefits of perpetual licensing
So what are the forgotten benefits of perpetual licensing and how do they apply to you? First of all this is only relevant in case you are looking at classic software products operated or hosted in your own datacenter.
If that is something of interest because you like or need to be in full control, then there are a number of very heavy-weight benefits:
- A perpetual license is ‘yours’ simply because it is perpetual. Nobody can ‘pull the plug’ once applied the final license key (and the product is of high-quality, so doesn’t require permanent vendor support and intervention).
- Instead, you as a customer can ‘pull the emergency plug’ on 100%(!) OPEX costs as you can cancel the support contract (again, given the product is of decent quality). This will cut your OPEX cost for the solution to zero while you can continue(!) using the product (because of 1.)
- You can buy the product license in good times, i.e. times with excess CAPEX budget. OPEX will be (much) lower than compared to SaaS. This allows for acquiring software technology for later long-term use, similar to buying tangible assets like a car or machine
- As pointed out above, if you plan for long-term usage of the product, your total cost of ownership will be lower compared to a subscription price and this delta will grow the longer the product is in use
No way back – but…
So, while there is ‘no way back’ from SaaS and subscriptions models, in some B2B, in government and enterprise segments, companies (still) offer on-premises software products. Like we do with Enterprise Alert. And while investors and shareholders love to see all business being on a subscription model with 100% recurring revenues, I have tons of feedback that customers do love perpetual licensing. For our ‘classic’ product we do offer both perpetual and subscription licensing. So, customers can freely choose their preference based on their needs. In fact, the majority of our new customers opts for perpetual licensing as they consider the business with us as a long-term investment and ongoing partnership.
It will be interesting to see how license models will evolve over the next few years. I would say there is always room for improvement.
The author, Matthes, is CEO and co-founder of Derdack and is actively involved in pricing and licensing strategies for Derdack’s software and SaaS products.