Embracing hybrid software licencing models

Today, pay-per-use software licensing and pricing models are hotly debated in the software vendor community amongst others. In theory, these models provide a convenient and cost-effective value proposition to enterprises: pay only for what you use, eliminating the large upfront license costs and ongoing maintenance fees. These models also provide flexibility—enabling consumers to use software wherever, whenever and however they need.

While the idea of a pure pay-per-use model has certainly captured the popular imagination, it hasn’t seen large-scale deployment for many practical reasons. Two oft-cited flaws are unpredictable revenue stream (provider) or cost (purchaser) and high operational costs to maintain. Many vendors also consider it an added nuisance to be measuring seconds or other fine units of usage, especially when some software can take a long time to load, or, if the software crashes in the middle of a task.

The future of application consumption may be evolving closer to a pure pay-per-use model, but today, software vendors are still in the process of assessing what works best for them and their customers. In the meantime, hybrid-usage models embracing principles of both pay-per-use and traditional licensing have evolved.

The Rise of the Hybrid Model

The emergence of SaaS, cloud, elastic computing and virtualisation as usage mediums has been a sea change for software vendors used to capturing revenue and market share through perpetual licensing.  These new models  allow vendors to not only capture additional revenue from existing customers, but also to offer other software licensing options  to prospects who may not want to consider  perpetual licensing. However, most software vendors’ existing customers do not have a need solely for pay-per-use software; and most software vendors still prefer to sell packages with some financially predictable options such as maintenance.  The result: the hybrid usage model.

Software vendors have achieved impressive results with hybrid usage models. The models, created with the vendor and consumer in mind, balance some amount of usage flexibility with reasonable financial predictability. Some of these models combine standard licensing with pricing premiums for peak usage.  Nearly all have a built-in pricing premium to account for the increased value and flexibility being provided to the user.

Some  hybrid models that have emerged to deal with different usage scenarios include:

Subscription: An annual or multi-year software licence that combines the right-to-use software with the right to obtain software updates and service. At the end of the term, all rights associated with the use of software and the acquisition of updates ceases.

Term: Software licences available in a variety of pre-configured terms and price-points. This allows the customer to establish a budget and purchase products when needed.

Remix: The customer has access to an identified set of software for a term such as a year, but can change the quantity or a percentage of the software periodically (e.g., 25 percent of the list price value can be changed quarterly) to phase out software that isn’t being used and replace it with software that is in high demand. Maintenance is typically included.

Token:  There are many variants of token licensing, but in general a token is a granular unit of measure, either in dollars, or activity (e.g. 1 transaction) that can be applied across multiple products in the product portfolio.  The customer will typically buy “X” number of tokens, which will then be counted and “consumed” as the software is used.  Tokens are typically purchased in advance of usage and counted down until exhausted. Again, typically maintenance is included. 

Workbench: A defined set of software is licensed as a unit based on the role of the user of the software (e.g. basic accountant, expert accountant).  There is a billing event if any of the software is used during the course of a period.  Since the software is sold based on a user’s role, there doesn’t tend to be a huge amount of usage variance among different types of users, but some variance is tolerated and built into the license model and price structure.  Maintenance is typically included. 

Debit Card: Not so much a licence model as it is a financial arrangement and fulfillment mechanism to deploy pre-defined term licences or tokens.  The customer pre-pays a dollar or token amount, and then draws down against the dollar amount, as the software  is needed, in the quantity and timeframe required. Maintenance is typically provided.

Peak Usage: Peak usage licensing enables peak periods of high performance computing by the creation of virtual machines that run in the cloud for burst periods.

Depending on customers’ specific usage needs, some vendors choose to offer one or several hybrid models packages, in additional to traditional perpetual licensing.

Considerations for Software Vendors

Software vendors considering hybrid models must consider the usage patterns of their customers and potential customers when designing offerings.  In addition, they must evaluate financial considerations—some organizations prefer to pay costs as capital expenditures; some prefer to pay by project; some prefer payment terms be upfront, and some in arrears. All of this will impact the type of licence that can be offered.  But, the most important question a vendor should ask when considering a hybrid offering is: will this model make it easier for a customer to do business with me?

In a world where companies have established a business model and market valuation based upon the perpetual licence model, many companies have found reasonable compromises in their trek toward pay-per-use models.  They have found a reasonable balance where they can provide customers the necessary flexibility to use the software, and yet make the level of usage reasonably predictable.

Given the variety of usage models available and the high degree of complexity involved in developing these products for market, most software vendors have opted to purchase turnkey licensing and entitlement solutions to add onto their products. This allows vendors to focus on their business problems and software development, rather than investing resources in maintaining licensing and entitlements.

As enterprise software users experiment with new usage models, remaining in compliance and optimising software becomes an even greater challenge. This underscores the need for continual software asset management, optimisation and compliance. More and more enterprises are choosing to deploy solutions offered by vendors specialising in enterprise software license management to offset any challenges they might encounter.

It goes without saying that technology—and the software marketplace—is constantly changing. Software vendors must constantly work to develop products that can penetrate new markets and satisfy existing customers. Hybrid, usage-based licensing models is the missing link between more traditional pricing models and the future of pure pay-per-use licensing.  

Tom Canning is the VP Asia Pacific of Flexera Software.