Ten years ago, when you licensed a new piece of software, you purchased a source-code control system, set up a server and installed the software. You paid costs associated with the server as well as labor costs associated with updating and upgrading the software. Risks such as a botched upgrade or software failure were solely your concern. Also, security was something that you handled on-premises.
Today, you probably access software as a cloud application. IT services firms or managed services providers manage hardware, software and security. In many cases, you expect to use the software on both your desktop and mobile devices. Software licensing has become a lot more complicated, and the gap — or gulf — between the way companies monetize their software and the way customers want to use software has never been more apparent.
Gartner and IDC predict that the SaaS market will generate $21.5 billion by 2015. As more businesses demand software-as-a-service (SaaS) and more software providers deliver software according to the subscription model, software companies are being forced to change the ways they do business. Even though change can bring challenges, SaaS delivers a great opportunity to bring customer needs and software provider goals into alignment.
How SaaS Benefits Customers
SaaS benefits customers by delivering predictable subscription costs along with free upgrades, both major and minor, as long as customers continue to use the software. Another advantage is that the provider manages all of the infrastructure costs, so the only costs to the customer are the subscription fees and associated training costs. In addition, customers benefit because SaaS pressures providers to equally prioritize both new and existing customers.
Some argue that the problem with periodic subscriptions is that customers sometimes end up paying for software that they aren’t using. If they use an application 30 times in one month and only 10 times in another, then the cost per use in the first month is much lower than the cost per use in the second month. Still, even though it seems illogical, customers often willingly pay a subscription fee for a premium to realize predictability. Predictable pricing benefits both the customer and the vendor.
3 Steps Along the Path to SaaS
As traditional licensing transitions to SaaS, software companies probably find themselves at one of these three stages:
- Traditional ESD. You are far beyond the days of shrink-wrapped cardboard boxes, but the perpetual licensing model delivered with an electronic software download (ESD) makes sense for you. Shifting to SaaS is possible, but it isn’t necessary. Companies with simple downloadable products or companies in highly regulated industries like insurance, finance or pharmaceuticals may fit into this category.
- Hybrid. You want to extend the value of your current software licensing and delivery models, but you’re looking into how to make the shift to SaaS. You may onboard new customers as SaaS-only, or you may provide a download with a perpetual license plus some type of subscription. A good example of this is an antivirus software company that charges for the initial download of its product and then charges a monthly subscription fee for updates.
- Pure SaaS. Many companies born in the cloud are pure SaaS companies. Their challenges include assembling a customer base that is focused on fewer large enterprise deals and more on multiple small and medium-sized business deals. Also, these companies need to focus not only on keeping software features competitive but also on the “service” element of SaaS.
Some software companies have used strong tactics to push customers toward SaaS and subscriptions. Microsoft, for example, has equipped its ESD products with “one-machine” licenses. If your computer fails, then you can transfer the product to a new computer. However, you can only transfer the software to a new computer once every 90 days, and you must eliminate copies of the software from the old computer. Alternatively, with a monthly Office 365 subscription, one user gets five licenses to install Office software on different devices.
By making the subscription model more valuable, Microsoft is encouraging its customers to make the move to SaaS. Other software companies aren’t so heavy-handed, but the transition to SaaS is, in many cases, inevitable. Stable subscription pricing benefits software companies, and lower costs and better service benefits customers while delivering the scalability and flexibility inherent to the cloud.
About the Author: Pat Regan provides consultation for companies working to monetize in the cloud environment. Regan prefers to use software monetization solutions provided by SafeNet.