Subscription Licensing Model


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What is a subscription licensing model?

Subscription licensing as a software license model is growing in popularity. So much so that many software vendors are now switching from perpetual licensing to subscription based licensing. A subscription software license grants the customer access to software they may previously have not been able to afford upfront, as well as supporting the ongoing development to build a longer term revenue model within your software monetization strategy and management. Here, we'll compare and contrast subscription and perpetual licenses so you can find the right software licensing types for your software products or site.

Perpetual license vs subscription licensing

The biggest difference between a perpetual license and a subscription license is the length of relationship (and fee paying) a customer has with the software vendor or developers needed to get access to the application. With a subscription SaaS license, customers regularly pay to access products based on predefined subscription terms. If they stop paying the subscription fee at any time, they lose access to the product and any subscription updates or support services. By contrast, under a perpetual license model, after initial purchase, the customer has the personal rights to use that software product for all time. However, with a perpetual software license, they may lose access to upgrades, software updates and technical support services after a certain period of time (usually a year) without a technical support services subscription.

Why the software subscription model is on the rise?

Most software started off under perpetual licensing. Case in point: Adobe's Creative Suite (Photoshop, InDesign, and more) was first released in the 1980s on perpetual license, but Adobe had to develop bigger, better versions of its applications to encourage customers to repurchase. Towards the end of their perpetual licensing, Adobe Photoshop cost nearly $1,000, making it a product only elite professionals could afford to use and enticing competition from cheaper alternatives.

By moving applications to a subscription software model, Adobe were able to generate recurring subscription revenue while making the software more accessible to a wider subscription customer market and defend against threats from new, cheaper entrants.

It's a familiar story. Most software companies have moved from upfront costs and perpetual licenses to a recurring subscription model for similar reasons. Microsoft, sensing threat from Google Docs, has made Microsoft Office products available under subscription with Office 365 (now part of Microsoft 365) and has managed to retain customer market share despite fierce cloud competition.

What are the advantages of a subscription licensing model?

The main advantage of subscription models is lower costs to the customer, either monthly or yearly. With a subscription, customers pay a regular subscription fee (typically, an annual or monthly fee) to access the software. The recurring cost is usually significantly cheaper than the upfront cost would be under a perpetual license, and is treated as an OpEx cost rather than CapEx expenditure. Technology changes rapidly, so subscription models also provide a degree of flexibility for customers, as well as giving them control to scale access up or down as needs change.

However, if a subscription customer becomes a long term customer of the software, the subscription cost may eventually add up to more than a one-time perpetual fee. If the subscription customer stops paying the subscription fee at any point, access to the software is cut off. 

For software suppliers, subscription models provide predictable, stable recurring revenue. As well as allowing you to continually invest in the product, subscription revenue can also increase company valuation.

What are the advantages of the perpetual software license?

Perpetual licenses have existed for longer than the software subscription model, from the days when a one-off fee was easier to process than recurring subscription licensed payments. After paying the upfront cost, perpetual customers have unlimited access to the software. To drive revenue, software companies would have to release regular new versions of the software, essentially selling the product again.

Identifying revenue opportunities in the subscription license vs perpetual license model

In the world of cloud and SaaS, subscriptions are gaining popularity over perpetual licenses because recurring revenue under a subscription is a critical component of most software development business models. In contrast to a perpetual license, vendors that offer subscription pricing can vary their offering, pricing model, create long term subscription relationships with customers, maximize profits, grow their products with reliable revenue, and target new market segments.

Download this popular white paper on subscription licensing: Rethink Your Software Monetization Strategy