Cetrus Blog

Hybrid Licensing Models - Wave or Ripple?

Posted by Erik Hoogerhuis on May 19, 2015 11:58:07 AM

The rapidly growing Software as a Service (SaaS) market is putting pressure on independent software vendors (ISVs) to offer multiple licensing models. We define an ISV as a software developer that creates downloadable software. A perpetual license is one in which the customer pays a one-time fee and receives the right to use for perpetuity a specific version of software.  Payment of annual maintenance fees provides support and newer functionality, which the customer is then entitled to use in perpetuity. The struggle over licensing and application/solution access pits two strong forces against each other. 

 Customers like to have multiple options:

  • One-time purchase agreements to reduce long-term costs and avoid future variability in their budgets
  • Subscription/lease for lower upfront costs and payment from operating budgets
  • “Pay-per-use” for infrequent, variable or short term usage

 ISVs prefer a perpetual license model:

  • For upfront revenue commitment to drive growth
  • Customer “lock-in”
  • Sales model simplicity
  • Ease and low cost of administration

Throughout this spring we will discuss some important reasons as to why ISVs should offer a hybrid licensing model. Today’s posting will serve as an introduction.

Let’s look back at the history of software licensing. Back in the days of mainframes, enterprise software could only be leased or rented. In the early 1980s, the rapidly expanding capital needs of software makers like IBM changed the paradigm to one of purchase. The internet didn’t exist so the economics of software for PCs and departmental systems dictated a purchase model, as the cost of sales, distribution of diskettes or tapes, and revenue administration was too great to support recurring revenue models relative to the value of the licenses. 

So we were trained to buy software. This was great from the ISVs’ standpoint; they got revenue up front. It was great for heavy users since the only limitations were the number of hours in a day a person was using the application or system resources for a computationally intensive application.

This model didn’t work for a casual user or for temporary or peak time usage. It was also difficult to manage and create appropriate pricing models if the end user company had a mixture of casual and heavy application users.  Once a license was distributed to the user, there was effectively no way to meter usage. ISVs were severely limited in their options to match usage and pricing:

  • Creating versions with different functionality was expensive and didn’t address user needs for incremental (part-time) access to a license
  • Negotiating short-term or usage-based licenses and managing the software via license keys was prohibitively expensive from a sales and administrative standpoint

Customers found ways to get more value from licenses by putting them on shared computers, implementing virtualization solutions, and various approaches to “cheating”.

Come back next week when we look at what changed to allow the Software as a Service (SaaS) model to take off.


Topics: Insider