Software pricing strategy – licence or perpetual?

Customers have changed the way they want to buy software. Historically all software was sold with a perpetual licence, meaning the customer could use the software indefinitely for a one-off fee. However, over the last ten years the subscription pricing model has become more prevalent, as software as a service (SaaS) and cloud computing have become more widespread.

The pricing strategy a company chooses impacts product positioning, customer sales volumes and ultimately revenue and profitability.  As a result setting the right pricing approach and levels are very important decisions for a company.  Here we explore 7 areas that software companies need to weigh up when considering moving to a SaaS pricing model.

Vendor challenges
The industry trend towards SaaS creates challenges for software vendors, which fall into 3 categories:

• Lower immediate revenue when the customer purchases, which threatens cashflow
• Immediate benefits for the customer needs to be demonstrated, as customers can usually cancel within a 30-day period
• It takes time (usually 3-5 years) to recoup the equivalent price of the perpetual licence

Vendor benefits
However, there can be significant valuation benefits from moving to a subscription model. This is due to 4 key factors:

• A predictable revenue makes it easier to manage cashflow on a long-term basis
• When an ongoing billing relationship is set up with customers, they are more likely than perpetual customers to purchase extra licence subscriptions or additional services (up-selling and cross-selling)
• A subscription model can be used to differentiate from the competition, attracting new customers and retaining existing ones
• Subscription pricing can reduce costs as all customers are updated to the latest release, reducing maintenance needs

Want to read the full list of challenges and benefits, and find out how to decide whether subscription or perpetual pricing is the right option for your company? Click here to download the full two-side article as a PDF.

To find out more, contact Jonathan Davenport at jonathan.davenport@milnerltd.com.

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