Blog Entry

Nov 6

Who’s The Winner – Simple or Flexible License Models?

Simple were the days when only perpetual licenses were sold, and each ISV decided on one locking criteria to build their price model around – like CPUs, cores or dongles.  Add floating/concurrent licenses, and a volume discount plan, and you had a price list that was pretty straightforward.  It was straightforward for customers, sales reps, customer services, configuration management, etc.  Those days are long gone it seems; ISVs need to offer an ever-growing variety of software licensing models to keep up with customer demands and competitive pressure.  Subscriptions, pre-and post-paid, usage-based licensing, capacity licensing, machine- or user-centric licensing (license follows the user) – the list goes on.  Each license model makes a lot of sense for someone, so where should you stop?

Think of it along the lines of pricing power: the more value your product creates, the higher a price you can charge.  And the higher the competitive pressure, the more pressure on pricing.  Similarly, the more value your software creates, and the more substantial the expense for your customers is, the more flexibility in terms of licensing models that are required to reflect how this value is captured by your customers.  The higher the competitive pressure, the more you need to differentiate with license models that fit your customers’ expectations.  An example for high-value software is the CAD space, where software license fees can easily exceed $10,000 per user per year for sophisticated applications.  Customers appreciate the value, but they want license models to reflect the work style of their employees (eg. commuter licensing for engineers who work in the office and at home) as well as of their company overall (eg. project teams scale up and down within a year).  An example for a highly competitive industry is the ERP space. Vendors have to charge for advanced feature sets once their customers move beyond the core ERP application to generate additional income with their fairly stable customer base.

One might think that as markets generally get more and more competitive, license models will have to become ever more complex.  That is true for high-end applications for high-end customers, but not the majority of mid-market products in the market.  Let’s take a look at phone charges in comparison.  Telecommunications companies are able to monitor and charge for usage at any level of detail, from peak hour pricing to physical distance of the connection.  We have seen all this happen.  Yet today’s “flat price” models dominate the consumer market.  For one reason – the complexity became too vast for all involved, both the consumers and the telecommunications industry.  For the standard user, there are simple pricing models, but for the high-end enterprise users, there are still incredibly sophisticated pricing models where value and cost matter much more than complexity.

This is where the ISV pricing models are heading as well: simple, user-based subscription models for the mass market and highly flexible, multi-parameter license models for sophisticated software with high-end customers.  That keeps the complexity cost down for the volume business with high-cost pressure, and allows the best options to share the value created at the high-end.

In short, in order to stay relevant and competitive, ISVs need to implement a licensing infrastructure that will allow them to provide both – simple and flexible pricing models to best answer the market needs and monetize their software.  Win-win.