The Pros & Cons of Subscription Software Licensing

Featured article by Ed Rossi, Vice President, Product Management, Flexera Software

The recent trend towards subscription licensing is transforming the software business, and the relationship between buyer and seller. While subscription-based software licensing has many merits – it’s not a panacea. Indeed, there are pros and cons to producers for offering subscription based software, and pros and cons for enterprises acquiring it.

Both producers developing software and their enterprise customers should consider the following pros and cons as they determine the business value subscription software.

Producer Pros:

– Predictable, Recurring Revenue Streams: Subscription software license models often deliver revenue growth and predictable and recurring revenue streams, which in turn results in stronger enterprise valuations. Assuming the software delivers important value, customers will continue to subscribe to the solution in the long run, resulting in more predictable revenues lasting far into the future.

– Growing the Customer Base: Subscription models tend to require lower up-front costs, which can be appealing to enterprises who prefer to tie software costs to actual usage and value over time, rather than paying the full cost immediately before the software has proven itself. Thus customer that might not have otherwise purchased a perpetual license may spend money on a subscription.

– Wider Market Appeal & More Options: A more flexible, pay-over-time approach can appeal to accounts with a big appetite for software but a limited budget for perpetual licenses. The subscription license model allows a wide and deeper penetration of your software for a given annual budget.

– Less Need to Discount: With lower up-front costs and the built-in ability of customers to discontinue the subscription once the term expires – there is less risk for customers to acquire your software. This can reduce pressure on producers to discount their software.

Producer Cons:

– Business Process Changes: Incorporating subscriptions into the licensing mix require business process changes, including amendments or changes to the subscription agreement.

– Revenue Deferral: Revenue is recognized ratably over the term of the subscription license. Bookings are immediate and a revenue backlog builds over time. This means initial revenue certainty will be unclear early on until renewal rates and sales pipeline stabilizes after the transition to subscription licensing.

Enterprise Pros

– Lower Cost of Entry: The hurdles to purchase software are lower because of the up-front cost of a subscription are generally lower than a traditional perpetual license.

– Operating vs. Capital Expense: Subscriptions can be a preferred model for businesses driven by operating expenses. Subscription software can be accounted for as an operating expense, versus perpetual licenses that are considered capital expenses.

– Producer Engagement: Under a subscription model, producers have high incentive to ensure customer satisfaction, as continued revenue depends on renewals. Accordingly subscription deals often foster strong vendor relationships.

Enterprise Cons

– Higher Total Cost of Ownership: If the software implementation is successful and becomes a long-term solution, subscription license cost will exceed perpetual license cost in the long run – generally after three to five years depending on the contract.

– Spend Uncertainty: Tied to this higher cost of ownership, long term spend for the software package becomes uncertain because of the ongoing nature of the subscription. As needs change, it is unclear how accommodating new enterprise requirements will translate to costs, which will have to be borne throughout the life of subscription and ensuing renewals.

Adding a subscription software licensing model can offer producers tremendous value in terms of new revenue and market expansion opportunities. Likewise, enterprises can enjoy flexibility and alignment of cost and value that traditional licensing models may not afford. However there are cons for both producers and enterprises. Accordingly, each should weigh those considerations and make business decisions only after weighing the options against business requirements.