Economy of Software: Licensing

Author: Buğra DEVECİ, Project Manager – Licensing

 

A software vendor has built a unique product which has remarkable impact for financial investors in the stock market. The product has a rich set of features which have never been experienced in the market previously. The company has invested much its resources in order to create that innovative software and the outcome can be stated as “perfect” from functionality perspective both for individual investors and institutions. So the crucial question would be: Is this adequate to create an enormous product to provide a recurring revenue flow? Does the company create a licensing strategy to monetize the business value of that software?

Software licensing has been a controversial and challenging topic for software vendors in order to maintain their financial stability. Two critical points which stand as benchmarks in the licensing strategies appeared during the past years. The first one is the security concern inherently i.e. the licensing strategy should be strong enough to protect the intellectual property rights of the company. The solution should prevent illegal use of the software and minimize the risk of losing money. The second point is the flexible use of software licenses both from the customer and company point of view. This approach should not only provide a simple understanding for the customer, but also provide a continuous revenue flow for the software vendor.

The technological improvement respectively business requirements bring important aspects which contribute to this concept by creating several licensing models. Even though additional types of models can be found on the various resources, top popular licensing models are explained in the following part below [1]:

  1. Perpetual Licenses: Potentially licenses with infinite validity. The licenses never expire but the customer is obliged to use the existing version of the software for many years i.e. cannot get software updates and services regularly. This model is also called as “traditional licensing model” in some resources. Moreover, this model can also include hardware based or user based licenses (a different categorization of licensing approach). The license is locked to a specific machine or user using complex algorithms and keys.
  2. Subscription Licenses: Depends on an agreement between customer and vendor, software licenses are available during a specific period (typically via a cloud system). One main advantage compared to perpetual model is that customer can benefit from all software updates without any additional fee. Subscription licensing offers a predictable finance status for software vendors as the payment is done periodically by all customers. At the end of the period, the licenses are extended depending on the customer’s decision. This model is most trendy one in the software industry. Investigations show that more than 80 % of software vendors will adapt their business model to subscription licensing in the upcoming years [2].
  3. Pay-Per-Use Licenses: Similar to the subscription licensing. The software licenses can be used by customer during a specific period but the pricing depends on the usage of licenses. The model might be combined with user based model. This model provides a flexible way for the customer in case the usage of software varies from time to time.

Most would agree that licensing model plays an important role in reaching financial targets of software vendors. Although some models are becoming more popular, a software vendor should decide to use the appropriate model which matches with the company’s business goals.

References:
[1] Top 3 Software Licensing Models. (2016, December 20). Retrieved from http://www.reprisesoftware.com/blog/2016/12/top-3-software-licensing-models/
[2] Petty, C. Moving to Software Subscription Model. (2015, November 12). Retrieved from http://www.gartner.com/smarterwithgartner/moving-to-a-software-subscription-model/  

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