Subscription vs. Perpetual License, How do you sell software?

Netflix, Salesforce.com, MS Office365 are all high profile examples of amazing successes in selling software as a service.  Of course, most SAAS vendors sell their software through a subscription model, that is, customers gain access to the service through a monthly or yearly subscription and never actually own the product.   iBankers are placing big valuation multiples for companies that can create increased monthly recurring revenue (MRR) streams. Hey, we even tried to get our “subscription-on” here at Bamboo Solutions!  However, I think it is time to take a hard look at when it is appropriate to price your products as a subscription and when it is not.  It is interesting to note that it is for these reasons that we are moving our products back to a perpetual license with maintenance pricing model.  We will track how this unfolds over the coming year.

I have seen over the past two years through companies that I consult with (really not a sufficient data set, so we will call it anecdotal evidence) that everyone is implementing or evaluating the subscription pricing model.  While this may seem like a subtle change or an easier way for customer to start with your product, i.e. no big upfront license cost or low customer commitment with easy to get out of monthly purchases, I am also seeing push-back and confusion.  Let’s look at the challenges faced by a customer when an enterprise purchases software as a subscription service.  These challenges fall into three categories: Operational, Security and Financial.

Operationally, subscribing to software that is being used to run critical business processes begs the question “What happens when I stop my subscription?”  Securing funding to pay for a subscription for years to come is not reasonable in spite of the operational risk of it being inaccessible.  There are good years and bad years for companies, yet, if payment is not made, your software will stop working.  In most cases this is not an acceptable risk.  For this reason, clients like to own their software so that they secure the technology once purchased.  Especially true if they have automated business processes and much of their data will reside in the software – read it gets more valuable to the organization the more they use it.

From a security standpoint, there are real risk and security audits a company needs to go through with their vendors that offer software as a service.   These audits are important and doable, but often can run $20-$30k per environment and are not feasible for smaller software companies who don’t have the financial capability or technical bandwidth to support this process.  So, even if you claim that this software is on premises and you are simply charging a subscription, your clients security team will need to verify that this is the case.

Financially we all think subscriptions make sense.  It has less upfront costs compared to a licenses/maintenance model.  However, subscription purchases can’t be purchased with dollars earmarked as a capital expense and wont be depreciated.  In other words, companies that are ready to purchase may not have the right “kind” of money to purchase your product.

There are cases where you will have to sell your product as a subscription.  When would that be the case?  Well, if the software you provide is reliant on a services provided by your infrastructure and the software is never “delivered”, then the customer is truly renting space and computing power and a subscription is warranted.   Think of it this way, if your company went our of business, would your software continue to work for the client?  If the answer is no, then your software is a service and as as service you earn the money every month you stay open.   This is the power of Salesforce.com, Netflix and others of the like.  However, if you are trying to sell your traditional on-premises software as a service offering, you may be opening yourself to sales hurdles that are just not worth it.  Remember, in the perpetual license model, maintenance is your MRR.  Pricing your maintenance properly is a point of another blog, but let’s not put our customers through the confusion and risk of a subscription pricing model if your product is not a service!

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