If you are like most software or intelligent hardware companies, you are either offering or seriously considering licensing your products on the basis of usage. Sure, for most, perpetual licensing will not disappear anytime soon, but market forces and the long-term financial performance of your business make usage-based licensing inevitable and desirable.
So what is the definition of usage-based licensing? IDC defines usage-based licensing as:
Usage based pricing/ Pay-per-use (PPU) software pricing provides enterprises with an annuity license model where cost is based on metered use of a software resource.
- Cost is determined by a periodic measure of resource utilization
- An agreed upon metric is used as a proxy for value, and a system or process is put in place to track usage of that metric
- Cost scales up or down according to resource utilization.
Other features of a PPU pricing model can include an up-front flat-rate charge and the possibility of fees/rebates associated with over- or under-utilization.
Is that how you think of usage-based licensing?
Why Enterprises Want Usage-Based Licensing
Enterprises are asking more and more frequently for a "pay for what I actually use" model. They want to be able to use any product, at any time, as much as they want (little or large), whenever and wherever they need it without having to pay for software or hardware that they don't use. Publishers are looking to meet these requirements with "usage-based" licensing. From an enterprise perspective, the value is obvious: no shelfware. Of course, the enterprises don't want "surprise" bills – and consequently "usage-based" pricing will need to have predictability in them (see True Pay-As-You-Go Software Licensing Model – Myth or Reality? on this topic). From a Publisher, the value is more subtle and subject to a future article.
Why Vendors and Enterprises have Traditionally Stayed Away from Usage-Based Licensing
For the vendor, updating their software to generate usage data and developing the infrastructure required to process that data is a difficult undertaking. In addition, the reality is today some enterprises are not willing to let vendors collect and process product usage data. With that said I have seen and talked with a lot of enterprises that are open to sharing the usage data as long as it is aggregated and anonymized, so I believe this objection will become less important for the enterprise.
Can You Offer Usage-Based Pricing Without Collecting Usage Data?
I believe the answer is "Kind of…but not really." So what do I mean by that?
Until there is a solution for on-premises software that (1) allows collect ion of any amount of usage and (2) shares it with the vendors (as the SaaS offerings do already), vendors are really not able to offer "true" usage-based licensing. However, some vendors have simulated usage-based licensing by implementing models where (1) the data collected must be the minimum necessary to support the usage-based "like" model – no more and (2) the data is not sent from the enterprises' facility.
Some software vendors use token models – where, instead of providing fixed configurations of product, time or consumption, each product and usage parameter combination consumes a fixed, predictable number of tokens that enterprises can track and periodically replenish. Solutions like this have been in practice in the technical EDA software market over the past 12-15 years. Again, these usage-based "like" licensing models are in place today and enable vendors to offer products the way enterprises want to buy them. So, you may be asking yourself, how does the token model work?
- Instrument your software or hardware with electronic licensing that includes the ability to draw down a token based on the primary model parameter(s) – start and end dates for time-based, disk space utilization for storage, bandwidth or channels for networking, etc.
- Provide your enterprises the ability to efficiently request, activate and account for token use. For example, given prior contractual and purchase agreement, your enterprises can access a web site to request a specific configuration of licenses of different types and granularities, quickly activate those licenses and keep track of expiration dates and accumulated expenses. This web site couples an entitlement management solution with a billing system.
Another approach is to use a draw down token. For example, I've talked to a vendor who wanted to do "500 minute cards". The application would track the minutes and decrement until there is no more using our software.
You can simulate "usage-based licensing" without having to collect anything from the enterprise's site—a viable solution for some, but not a "true" usage-based licensing model.
What are your thoughts on usage-based licensing? How do you define it? Are you offering "true" usage-based licensing?