Breaking free from perpetuity

In the dynamic world of software licensing, a notable transformation is underway as perpetual licences make way for subscription-based models. This shift signifies a departure from perpetual ownership, embracing a more adaptable and cost-effective approach.

This article explores the advantages of subscription-based software licensing, including regular updates, flexibility, and other enticing benefits. Discover why organisations are increasingly breaking free from perpetuity and embracing subscription licensing.

A subscription-based revenue model has numerous benefits for companies including: improved revenue predictability and higher company valuations relative to technology companies with less sticky revenue models.

However, transitioning from a perpetual to a subscription-based licensing model also offers several benefits for customers:

Cost-effectiveness

Subscription licensing typically involves lower upfront costs than perpetual licences, which require a significant initial investment. This makes the cost of the software much more affordable as users can now pay monthly or annually instead.

Regular updates and upgrades

Subscription models often include automatic updates and upgrades as part of the service. This ensures that users can access the latest features and security patches without additional costs. It also eliminates the need for separate upgrade purchases or the risk of using outdated software.

Flexibility and scalability

Subscription licences give users greater flexibility as they can easily adjust the number of licences based on their changing needs. This allows businesses to align their licensing costs with their actual usage.

Access to additional services

Many subscription-based licensing models provide additional services and resources beyond the core software (e.g. support, cloud storage etc.). This means that users benefit from a package beyond the software itself.

Enhanced security and compliance

Subscription licences often include built-in security features and regular updates. This helps protect against threats and gives users confidence in their data security and regulatory compliance.

Simplified licence management

With a subscription model, licence management becomes more streamlined. Updates and licence renewals can be automated, reducing administrative overhead and freeing up resources for other tasks. This allows businesses to focus on their core operations rather than managing software licences.

Overall, transitioning to a subscription-based licensing model offers cost-effectiveness, flexibility, regular updates and access to additional services. This makes it an attractive option for many individuals and businesses. However, before making this change, it is important to consider your user demographic. For example, our clients have experienced more resistance from customers in certain regions of the world (Asia, Africa, Eastern Europe and Latin America) when trying to switch from the perpetual to the subscription licensing model.

That sounds great! I am now convinced about changing from a perpetual to a subscription model, but how do I implement that?

Transitioning from a perpetual licence to a subscription model can be complex, but it can be done successfully with careful planning and execution. Here are some tips for making the transition:

Understand your customers

Before you make any changes, it is essential to understand how your customers use your software. This will help you determine which customers would be receptive to a subscription model. When transitioning, it is also important to start with a small group of customers before rolling the model out to the entire customer base.

Have a clear value proposition

Communication with your customers is key. Before switching to a subscription model, you need to ensure that your customers know your solution’s true value. This will help them to understand how they benefit from a subscription model. You should also consider offering incentives to your customers to encourage them to switch (e.g. additional features or a free first year of subscription).

Simplify the migration process

It is crucial to make transitioning to a subscription model as seamless as possible for customers who may not be initially interested. Offer ample support, and create a custom migration plan to ensure a hassle-free transition for your most valued customers.

Communicate with your customers regularly

Keeping your customers informed of your plans throughout the transition process is essential. This will help to reduce any anxiety or confusion they may have.

Be patient

Changing to a subscription model takes time. Be patient and continue communicating with your customers as you transition. To ease the switch, it is vital to offer excellent customer service and ensure your customers are happy with the new model.

Following these tips, you can successfully transition from a perpetual licence to a subscription model.

Excellent, I am really looking forward to making this transition. But, what if I want to sell my business or fundraise in the short-medium term?

Investors and acquirers much prefer the predictability of subscription-based revenue models. However, if you are planning on a corporate finance transaction in the next 18 months, it is essential to consider the impact that transitioning from a perpetual to a subscription revenue model can have on short-term revenue. Investors are attracted to businesses which demonstrate consistent revenue growth and robust customer retention figures. Making any alterations to the revenue model could impact how an investor or acquirer would view your business. In such cases, investors may focus on other indicators like logo retention and usage metrics instead of gross and net dollar retention when analysing your company’s performance.

Transitioning from perpetual to subscription-based licensing brings numerous benefits for the company and its customer base. While careful planning and clear communication are crucial, the advantages of this shift make it an attractive choice for businesses. However, it is important to consider the potential impact on short-term revenue, particularly when approaching a corporate finance transaction. Overall, embracing subscription licensing empowers companies to adapt, thrive, and unlock long-term success in the evolving technology industry.