Subscription Software Licensing Vs. Perpetual Licensing
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With big name, traditionally boxed products like Microsoft Office and Adobe’s Creative Suite turning to new subscription licensing models we, as IT pros, have to look into this model and determine if and when it is right for our businesses. In some cases, like with MS Office, we have choices to buy boxed products, volume license deals, or subscription licenses. This is very flexible and allows us to consider many alternatives. With Adobe, however, non-subscription options have been dropped and if we want to use their product line, subscription pricing is our only option. As we move forward this will be a growing trend and something that the industry must face and understand. It cannot be avoided easily.
First we should understand why subscription models are good for the vendors. Many people, especially in IT, assume that subscriptions are designed to extract higher fees from customers and certainly any given vendor may raise prices in conjunction with changing models, but fundamentally, subscription pricing is purely a licensing approach and does not imply and increase in cost. It may, potentially, even mean a decrease.
Software vendors like subscription pricing for three key reasons.
The first is license management. With traditional software purchases it was easy for customers to install multiple copies, perhaps accidentally, of software, which can cause a loss of revenue for vendors if the software was used but not licensed. License management was traditionally complicated and expensive for all parties involved. Moving to subscription models makes it very easy to clearly communicate licensing requirements and to enforce policies.
For customers purchasing software, this change is actually beneficial as it lowers the overall cost of software because it helps to eliminate illegitimate uses of software. By lowering the piracy rate the cost that needs to be passed on to legitimate businesses can be lowered. Whether this turns into lower cost for customers or higher margins for vendors, it is a benefit to all of the legitimate parties involved.
In traditional software and support models, customers might use old versions of software for many years resulting in many different versions, which would require support of multiple versions from vendors. Often, this would mean that support teams need extensive training for a long tail of legacy customers or separate support groups would be needed for different software versions. This was extremely expensive as support is a key cost in software development.
Likewise, development teams would be forced to be split, with most resources focusing on developing or fixing the current software version while some developers would be forced to spend time patching and maintaining legacy versions that were no longer being sold. These costs were often enormous and meant that great energy was being spent to support customers who were not investing in new software and came at the expense of resources for improving the software and support for the best customers. The move to subscription licensing generally eliminates support needs for legacy versions as all customers move to the latest versions all of the time.
Again, this is a move that greatly benefits both the vendor and good customers. It only sometimes is a negative to customers who were relying on being “expensive to maintain” customers who used old software for a long time rather than updating. But commonly even those customers benefit from not running old software, even if this is not how they would operate if they had their druthers. The benefits to the vendor and to “good” customers is very large, the penalty to customers that were formally not profitable is generally very small.
The third reason, which is really a combination of the above, is that customers who previously depended on buying a single version of a product and continuing to use it for a very long time, likely many years past the end of support, are effectively eliminated. These customers, lacking a means to buy in this traditional manner, are normally either lost as customers (which is not a financial loss as they were not very profitable) or they convert to higher profit customers, even if begrudgingly. This makes vendors very happy – separating the wheat from the chaff, so to speak. This way vendors cut loose customers that are not making them money and create more customers that are making them money.
Now that we have seen why vendors like this model and why we are likely to see more and more of it in the future as large, which leads vendors to both demonstrate the financial value of the change and condition customers to think in terms of subscription license models, we will look at why IT departments and businesses should consider embracing this model for their own reasons.
To the business itself, subscription licensing offers some significant value, especially to finance departments. Through moving to subscription licensing we are generally able to move from capital expenses (capex) to operational expenses (opex) which is generally seen as favorable. But subscription value is far larger than that. Subscription pricing gives cost predictability. A finance department can accurately predict their costs over time rarely being surprised, whereas, in the old approach, software was largely forgotten and then some need would require an old package to be updated and suddenly a very large invoice would be forthcoming with potentially very little warning (often followed by large re-training expenses due to the possibly large gap in software versions.)
With subscription pricing, costs normally fluctuate fluidly with employee count. As new employees are hired the finance department can predict exactly how much they will cost. And when employees leave, subscriptions can be discontinued and cost reduced. Only software that is truly used is purchased. The need to overbuy to account for fluctuations or predicted growth no longer exists. Subscription licensing also leverages the time-value of money allowing businesses to hold onto their funds for as long as possible requiring them to pay only for what they use as they use it.
For IT the benefits are even greater. IT should benefit from having a better relationship with finance and human resources as the costs and needs of incoming or outgoing users are better understood. This eliminates some of the friction between these departments which is always beneficial.
IT also benefits from the effective enforcement of best practices. It is common for IT departments to struggle to convince businesses to invest in newer versions of software, which often results in support issues and unnecessary complexity and less than happy users. With subscription pricing, IT is constantly supplied with the latest software for users, which, in nearly all cases, is an enormous benefit both to IT and to the users of the software. This eliminates much of the friction that IT experiences with the business and with management by moving the need for updates to an external mandate and no longer something that IT or the users must request.
IT benefits from easier license management on their end as well. It is generally far easier to determine license availability and need. Audits are unnecessary because the licensing process is generally handled (generally, nothing technically requires this) via an authentication mechanism with the vendor, which means that unless specific effort is taken to violate licensing (cracking software or some other extreme measure) that licensing accidents are unlikely and easy to correct.
IT may also benefit from easier ability to handle complex licensing situations such as providing a higher feature set level for one user and not for another. Licenses can often be purchased at a minimum level and upgraded if more needs are discovered. The ability to easily customize per user and over time means that IT can deliver more value with less effort.
Many of the objections with subscription licensing are not actually with subscription licensing itself. Often it is a perception of higher cost. This is, of course, difficult to prove since any given company may choose to charge anything that they want for different license options. Microsoft offers both subscription and non-subscription license options for some of their key products such as MS Office. This gives us a chance to see how they see the cost differences and benefits and to compare the options so that we can find the most cost effective option for our own business. By keeping both models, Microsoft can be audited by their customers to keep costs of each model in line. However, by offering both they also lose many of the benefits that pure subscription models bring such as needing to support only a single version at a time.
Adobe, on the other hand, made the switch from traditional licensing to subscription licensing basically all at once and appears to have decided to raise their prices at the same time. This is very misleading because Adobe actually raised the price, and it is not the subscription model creating the price increase. The benefits of subscription pricing are benefits of the model. The pricing decisions of any given vendor are a separate thing and must be evaluated in the same way that any pricing evaluation is done.
The other common complaint that I have heard many times is an inability to “own” software. This is a natural reaction but one that IT and business units should not have. In a business setting, software is not owned by people and we should have no emotional ties to it. Software is just another tool for completing our work and whatever gives us the best ability to do that, at the best price, is what we want. From a purely business perspective, owning software is irrelevant. The desire to own things is a human reaction that is not conducive to good business thinking. It is also very valuable to point out that IT should never have this mental reaction to owning software – it is the business, not the IT department or the IT professionals, who own software in their business. IT is simply selecting, deploying, configuring, and managing the software on behalf of the business that it supports.
Overall I truly believe that subscription licensing models are good, in general, for nearly everyone involved. They benefit vendors in such a way that it enables them to be more viable and profitable, while making it easier for IT departments to deliver better value to their users often while enforcing many best practices that businesses would otherwise be tempted to avoid. The improved profitability may also encourage vendors to pursue niche software titles that would have been previously unaffordable to create and support. Vendors, IT, and end users are nearly universal winners while businesses face the only real grey area where pricing may or may not be beneficial to them in this model.
Photo credit: George Thomas via Flickr
