Blog Entry

Apr 27
2010 

The Three P’s of Licensing

I don’t know if they teach this in every MBA program, but I am sure you have heard that every business case can be boiled down to a certain number of “P”s. It is just a question of how many…some have 4 P’s, some have 5; but in this world of Twitter and brevity, I am going to go with the three that matter most when you think about creating licensing approaches for software: Piracy, Portability, and Profitability.

Piracy is a hard thing to truly measure. Several organizations, such as BSA, put out statistics. But, really,  it doesn’t take a genius to figure out piracy is higher in China than it is in the U.S. What matters more is figuring out how piracy affects revenue within your product’s Total Addressable Market (TAM).  The key question you are trying to answer is – would those pirating your software ever really pay for it? Defining your TAM involves understanding price points of the product, demographics (geographic, age group, etc.) your product targets, and whether the product is consumer-only or Enterprise.  Once you have this data, you can draw some conclusions (based on actual revenues you have from the intended audience of the product) to see if piracy is a factor you need to sweat over.

Portability is primarily about making it easy (or not!) for your customers to actually use your software. Do you want to allow the user to use the software on a specific machine, or make it available wherever they want to use it? Apple allows your iTunes library to be available on 5 computers – a somewhat arbitrary number, yet that is how they have chosen to define the portability of your library. Microsoft chooses to bind the license of their application to a home user to a specific PC. There are other software applications that measure number of active seats, but it doesn’t matter who or which machine is using them. In general, portability of the software is all about the amount of flexibility you allow, what price.

Profitability is the “P” that matters most. But it is not just a simple case of charging the highest price you can get for your product – it is more about creating the optimal price points to get most of the TAM defined above, and then measuring the cost of supporting those price models and the consumer base you have created. The net of the two numbers is your profit – and that is what you are always trying to figure out. For example, you may have a product where you can charge $1000 for a perpetual license but only 100,000 users might pay that – another 1M users might prefer an annual subscription for the product and be willing to pay $300/year. Now you have expanded the customer base. But you do have to take into account the cost of supporting subscriptions and measure the profitability of that incremental revenue you generated by adding a new business model.

Overall, it is hard to break out the three P’s above – they are intertwined. Piracy (prevention) and Portability requirements should feed into the licensing model discussion, and once you have figured out the operational cost of implementing licensing/fulfillment/delivery of the solution, you will arrive at the Profitability. It is an iterative process but a must before you roll out your product.

  • http://profile.typepad.com/mnerlinger Mnerlinger

    Ahhh so true, but this does bring up two questions I hear from ISVs on a daily basis: a). which yields more profitability — portability or piracy prevention and b). is it possible for portability and strong anti-piracy to co-exist? What is your experience? Comment here or join the discussion via LinkedIn – http://bit.ly/3PsDiscussion

  • http://profile.typepad.com/justinbenson1 Justinbenson

    You raise a good point for piracy in terms of “would those people pay for it anyway?” Do you see the concept of “copy creep” as part of piracy? That is – end users who are not sure what sort of corporate agreement they have but assume that if it’s on 5 engineers PC’s they too should be able to install a copy?
    Is keeping “honest people honest” a subset of piracy or a category of its own?

  • http://profile.typepad.com/ppanjwani Ppanjwani

    I think most software publishers define what they consider to be acceptable piracy – be it in their own customer base (so-called unintentional piracy) or malicious piracy (sometimes considered a good viral way to spread your product). But from the enterprise (i.e., a corporation) perspective , keeping honest-people-honest is no longer an option, due to compliance. So, the irony is – that the software publisher is actually helping their corporate customers by providing the right mechanisms built into the product to keep their usage honest. Software publisher wins (reduce piracy); Enterprise customer wins (reduced compliance monitoring challenges). Of course, all this has to be done keeping the other P’s in mind!

  • Dave DiMillo

    Michelle raised two good questions that do indeed surface from ISVs. My knee-jerk reaction was to give the never-impressive answer of “it depends” because anti-piracy and portability can certainly run inversely proportional to one another. In certain models, the ISV has to give up one to get the other so it can depend on what the ISV wants to achieve and what risks they’re willing to take in order to satisfy their sweet spot.
    But I do believe the two can coexist given the right licensing model, the right underlying technology and a fair amount of foresight and planning on the part of the ISV. I also think the ISV’s 4th P (planning) starts with P number 5: Prioritization.
    Catch more thoughts on this topic next month on this discussion board and at http://www.licensinglive.com.

  • Jam Khan

    An interesting topic and one that almost all software publishers struggle with. But I believe that most publishers, short of those in certain niche markets, are less concerned with piracy, but rather ‘permissions’. I thought I’d stick with the ‘P” theme here. If one goes by the age old adage of “innocent until proven guilty”, most publishers will focus on ensuring that users are aware of their permissions, often referred to as entitlements. In a way this is an approach to piracy prevention, but one that does not fundamentally clash with portability or profitability.
    Ultimately the only that does matter is ‘profitability’, and software publishers will look to leverage content updates, bug fixes etc to ensure that only users with appropriate permissions are receiving the benefits they have paid for. It is rare to see a publisher sacrifice portability.
    The internet has made piracy much more rampant and far easier to conduct. But it also creates a medium where software publishers can have easier and better contact with their customers. Authenticating users, identifying appropriate entitlements make it much easier for publishers to weed out legitimate users from those that are using pirated versions of their software. With the right pricing and delivery model I believe that neither portability nor profitability need be sacrificed in order to cut down on what is traditionally been dubbed as piracy.