In the previous blogs, we discussed the addition of a subscription license model as an alternative method to license and sell your products. The subscription license model, which combines the right-to-use along with the access to software updates for (typically) a yearly fee, can help you penetrate new markets by making your software more attractive to customers who prefer a lower start-up fee or who may need to account for the software from an expense budget.
However, the subscription license model is really only the tip of the iceberg when it comes to selling your software using a different license model. The goal of selling your software with a new license model is to make it easier for your customers to do business with you, allowing them to buy software in a way that makes sense for their businesses.
Balancing Usage Flexibility with Financial Predictability
The ideal flexible model is the “pure” pay-per-use license model. This involves licensing and pricing software based upon the amount of software that is used, as measured (or metered) by some metric that represents meaningful usage data for a particular product (e.g. minutes of usage, number of transactions, number of TB of managed storage, number of documents processed). This is similar to how we pay for utilities such as water or electricity – the more we use, the more we are invoiced at the end of the billing period. In many ways it seems like an ideal model.
Our experience with customers has shown that pure pay-per-use license models are not frequently deployed by software publishers, largely due to the lack of financial predictability of such a model. Usage can vary wildly, and therefore, so can the associated license fees. Both the producers and consumers have little visibility to the financial impact on their organization. It’s this lack of predictability that has largely prevented the proliferation of pure pay-per-use license models.
When and Where Usage-Based License Models Resonate
What we see frequently is that software producers sell software with a license model that balances some amount of usage flexibility with reasonable financial predictability, for example a term license model may offer a variety of pre-configured license terms and price-points, ranging from 1 month to 3 years. This allows the customer to establish a budget and purchase products based on need and usage patterns. In our next blog we will dive deeper into additional hybrid models that combine usage flexibility with financial predictability, but before doing so, it’s important to realize that usage based license models won’t apply to all software sold in all markets, but they do tend to resonate when one or more of the following factors exist. We see these quite frequently in the technical vertical B2B markets such as Electronic Design Automation, Mechanical CAD, Software Development, Oil & Gas Exploration, and Life Sciences & Medical Research:
· The “buyer” is a large customer of the software producer with a sizable annual budget.
· There is a wide portfolio of software or complex enterprise software offered by the producer that the consumer of software may require, but where the forecasting of exactly when/where the software is used may not be well understood at the time of the purchase.
· The software is expensive to procure, typically costing tens of thousands to hundreds of thousands of dollars for a single software title.
· Where a market is maturing and the software producer is looking to protect a market position against point tool competitors by making it financially enticing for the customer to buy an entire suite of software.
· The software producer is trying to enter a market and create an advantage by lowering the barrier of entry to acquire and use the product.
· The software license is purchased within the context of a project expense budget.
· “New” computer environments are employed to run the software, including SOA/web-services, grid computing, SaaS, or virtualized computing.
Usage based license models probably don’t make a lot of sense in the B2c situation, where the software producer is selling inexpensive (or low value) desktop software to consumers.
When it comes to usage based licensing, has your company adopted such an approach? And if so, what kinds of license models have you rolled out? Let us know!
Next Blog: Which of these usage based models is right for you -- term licenses, remix, consumptive token, or debit card?
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