Today, pay-per-use software licensing and pricing models are hotly debated in both the enterprise and the software vendor community. In theory, these models provide a convenient and cost-effective value proposition to enterprises: pay only for what you use, eliminating the large upfront licence 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 yet, for many practical reasons. Two flaws often cited are the unpredictable revenue stream for software vendors, and high operational costs to maintain for companies and software vendors alike. 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 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 and enterprises can leverage them for business and economic advantage.
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 organisations 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 of enterprises 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 to use the software and updates cease.
- Term: Software licences available in a variety of pre-configured terms and price points. This allows the enterprise to establish a budget and purchase products when needed.
- Remix: The enterprise 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 currency or activity (e.g. one transaction) that can be applied across multiple products in the product portfolio. An organisation 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 licence model and price structure. Maintenance is typically included.
- Debit Card: Not so much a licence model as it is a financial arrangement, and a fulfillment mechanism to deploy pre-defined term licences or tokens. The company pre-pays a money or token amount, and then draws down against the cash 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 enterprises’ specific usage needs, some vendors are also offering one or several hybrid models packages, in additional to traditional perpetual licensing.
Considerations for software vendors
Clearly, the options for hybrid models are many, but enterprises must be aware of the rationale and considerations that software vendors face when developing such models. When developing hybrid models, software vendors consider the usage patterns of their existing and potential customers. In addition, they evaluate financial considerations. Some organisations 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 impacts the type of licence that software vendors can offer. But, the most important question a vendor asks when considering offering 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 software companies have found reasonable compromises in their trek toward pay-per-use models. They have found a reasonable balance where they can provide organisations the necessary flexibility to use their 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 licence management to offset any challenges they might encounter.
It goes without saying that technology, and the software marketplace, is constantly changing. Software vendors are constantly working to develop products that can penetrate new markets and satisfy existing customers. Hybrid usage-based licensing models are the missing link between more traditional pricing models and the future of pure pay-per-use licensing. Smart enterprises should explore the possibilities.
Vincent Smyth, EMEA General Manager, Flexera Software
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