Software Subscriptions vs Perpetual Licenses

John Delaney.

 

The march to SaaS based subscription models for selling most kinds of software forges on. There’s little doubt that in most cases SaaS will be the preferred model for both software companies and customers alike. As a software vendor, you may have clients asking you to explain the differences or perhaps you need to help a client transition from a perpetual license to subscription model service. Here’s a few considerations and pro and cons to keep in mind.

For this post, we will assume you understand the basic differences between SaaS based subscription models and perpetual licenses. The focus here is to outline what the key differences an considerations can be for your clients.

 

How to numb the pain of sticker shock

The large upfront payments that accompany perpetual licenses have long been a stumbling block that software vendors needed to get their potential customers over. By their nature, the regular (usually monthly) payments under subscription models means customers don’t need to find large amounts in their budget to make a purchase.

 

Over time however – subscription payments may mean the customer ends up paying more than they would have if they had just coughed up the cash up front. If they are being asked to transition from a perpetual license, they will do the math and compare. Be ready to justify any overall increase by pointing to new inclusions, upgrades, services or features. More on this later.

 

It’s worth noting here, that Multipli’s subscription prepayment financing can help alleviate the pain of sticker shock for perpetual licenses. We still pay the software company the agreed value of the contract upfront – while spreading out the repayments for the customer over time. This often can make the sale much more palatable for the buyer and also help you avoid having to offer discounts upfront to get them over the line.

 

Multipli’s subscription prepayment financing can help alleviate a lot of pain around sticker shock for perpetual licenses.

 

Pricing over time

As mentioned above, subscription models generally mean a comparatively lower cost for customers to get started than with a perpetual license. There may be payments tied to implementation and/or customization, but these options are generally more limited as lower upfront costs, ongoing support and easy scalability are key selling points of a subscription model. Customizations are often handled by third parties. Raising prices on subscription models can be tricky if the customer doesn’t see extra value. Most subscriptions can be easier to cancel than a perpetual license – which  can jeopardize your MRR and consequential ARR and cause more churn to manage for you as a software vendor.

 

With perpetually licensed agreements its common to have separate services agreement covering implementation or in customization. It’s more common on these cases for a greater level of customzation to occur – particularly if it’s on-premises. These customization costs aside – the customer has a clearer idea of the exact cost of the perpetual license cost for the term of the contract and are not at the mercy of a subscription service provider raising fees in the future. Most perpetual contracts will include something to cover ongoing maintenance – but exactly what depends if its on-premise and the customer is maintaining the software themselves or the provider is looking after support.

 

Accounting considerations

One of the key differences for your customers between subscriptions and perpetual licenses is from an accounting perspective. Your customers are able to treat subscription payments as an operating expense whereas for the larger up-front payments associated with perpetual contracts – the cost is treated as a capital expense. Lots of businesses see it as an advantage to shift these costs to operating expenses but it will depend in your particular customer’s business and circumstances.

 

Warranties

Perpetual licenses usually limit performance warranties to as little as 90 days in which time the vendor will normally fix or replace the software or if needs be a refund. After this initial warranty period, the customer will likely have to go by the terms of a service agreement or pay for additional warranty coverage.

For a subscription service, there is usually a level performance warranty that applies for the term of the subscription. Usually the provider will agree to either repairing the issues or terminating the agreement, perhaps with a pro-rata refund for the outstanding term. The customer usually has more power here to influence the outcome as it’s often much easier for them to end their subscription.

 

Listen to your customers

Overall subscription models, with lower up-front pricing, easy scalability for the customer and constant support will be most appealing. But not always. So make sure you hear what your customer is concerned about. Equally, if the software only comes under a license arrangement and your customers want a subscription model make sure you hear them. In this case Multipli’s subscription prepayment financing allows you to give your customers what they want while still meeting the software company’s terms.