Subscription-Based Software: The New Normal?
Licensing models are slowly changing to be subscription based across the industry. But many organizations still use perpetual licensing.
August 11, 2023
Engineering software, like many other enterprise software offerings, is migrating away from a perpetual license—you buy it, install it and own it forever—to a subscription-based model where you buy it as a service and make recurring payments. The license is time-based.
As this trend takes hold, the question arises: Is this model a good thing or not so great for user organizations? After all, it’s a recurrent expense, and a growing dependence on the software means that you’ll be dependent on that subscription and all of its terms and conditions.
But then again, you’ll get the latest and greatest version of the software, hopefully, with all the latest security patches and maintenance. Any bugs in the software and how it is installed and operating will be on the vendor and not the user.
So, is a subscription-based model better? It depends on who you talk to.
Plug and Play
“Consumers always win with subscription-based licenses,” says Ravi Kunju, chief product and strategy officer for Altair. “This model delivers many benefits, including lower upfront costs, the flexibility to use anytime and anywhere and because it’s a vendor-agnostic system, it will work with any existing software.”
Such models, Kunju notes, also enable customers to keep updated with the latest version and technology.
“At Altair, another great advantage is as our product offering continues to expand, our unique licensing model makes the most sense for customers—they are granted full access to our suite of products, and they don’t have to be locked into individual standalone licensing,” he adds.
As easy as the software was to plug into, users can just as easily unplug their subscription.
“From a software provider standpoint, subscription-based licensing allows vendors to build recurring revenue models as well as perform ongoing updates to the product. With that said, customer turnover is always higher with subscription-based products due to heightened competition to provide the best ongoing value. More recently, many organizations are facing significant SaaS [software-as-a-service] contract price increases during their renewals,” says Hitesh Naidu, principal, cloud and custom applications at Capgemini Americas.
“This is due to the current economic climate, as well as various labor and sustainability costs,” Naidu emphasizes. “Ultimately, the choice between subscription-based licensing and more traditional approaches depends on the specific needs and priorities of the organization or individual. Factors listed above such as budget, scalability, collaboration requirements, control and long-term usage plans should all be considered.”
Simpler and Scalable?
A key advantage to the time-based subscription is faster installation. The implementation is easy and mostly without headaches. But that may not be the biggest appeal. With a SaaS model, use of the software is easier, and the product is much more scalable in the age of distributed workforces.
“People often think about the software licensing model based on the approach used for implementing the software,” says Eric Doubell, CEO of Razorleaf. “For cloud-based implementations, people typically assume subscription licensing models, while for on-premises implementations they often assume perpetual licensing models. However, subscription licensing is just as valid for on-premise implementations. The primary reasons for choosing subscription licensing have little to do with the implementation approach.”
“Generally, subscription licensing models are simpler for everyone involved,” says Doubell. “From a customer standpoint, subscription models are more flexible, allowing the business to scale up or down the number of licenses and subsequent cost for the software. Purchasing licenses is also easier as subscriptions fall into an organization’s operational expense budget rather than lengthier and more cumbersome capital expense processes.”
Aside from the economies that a SaaS model creates, it also allows admins to monitor usage and know some of the metrics surrounding which license seats are using it and how often. This might help substantiate some decisions regarding how many license seats are needed and where they should be used.
“At Autodesk, we’re moving aggressively toward the cloud because of the many benefits we know it offers industry. On-premises and standalone licenses are not connected to the cloud and that lack of connection means customers cannot take advantage of the many services that are included in cloud-enabled environments, such as the power of infinite computing to run simulations or the built-in collaboration tools that have become a critical part of modern workflows,” says Carl White, vice president of global revenue operations at Autodesk.
“The value of a subscription is it enables all those services via connection to the internet and also means that the software can continually receive new features and updates that give users the latest and greatest features and functionalities regardless of the release cycle,” White says.
A subscription gives significant information to admins about software use that allows them to make decisions about software spend.
“The on-premises and standalone models also charge a premium price because the software is perpetual, and the software can only be kept up to date with a ‘maintenance’ contract,” adds White. “With a subscription, customers are not locked in to either paying maintenance or watching the value of their perpetual license decline. Instead, they are permitted to come and go as their business requires, making it a far more flexible option.”
There are many value-adds with a subscription-based model. They reduce many usage risks such as obsolescence and the cost of upgrading to a larger enterprise scale of usage. The potential economic savings and easy user interface pay dividends for the owner, user or customer, but also make it easier and profitable for the vendor.
“There is an initial win for both parties in moving to subscription bill models,” says Tom Zauli, senior vice president and general manager at SOFTRAX. “The client experiences less upfront cost, and the provider obtains what should be a more stable revenue stream. Providers should be aware of a potential hit to revenue in year one as higher dollar license sales are converted to subscriptions that yield lower, year-one revenue.
“A further win is obtained by migrating to consumption-based subscription models,” Zauli adds. “These models enable the provider to truly optimize how they monetize their relationship with their clients. Though less common, subscription and consumption models can be offered for on-premises software. However, by providing offerings via a multi-tenant cloud application, the total cost of ownership (TCO) for the client is reduced with minimal impact to the provider. Further, the offering tends to justify a subscription price increase larger than the incremental cost to the provider of running the application in the cloud. Expensive upgrade activities are reduced or eliminated for the customer via the continuous release possibilities available in the cloud.”
“Innovation in technology must be coupled with economical access and an easy user experience,” says Altair’s Kunju. “In addition to investing in our software technology, we have also invested in our unique subscription licensing so we can provide the highest value to our customers. It’s a powerful offering that is unlike anything else on the market.”
“We see several different types of customers, all of whom want and need different options,” says Autodesk’s White. “There are those happy with their fixed model and want to stick with what they have. There are others who are taking advantage of our subscription model and want the flexibility to use any product. Finally, there are those combining the best of both—they’re both subscribing to what they need and leveraging other options based on consumption.”
Now, and probably well into the future, the industry can expect subscription-based models to grow and be the new normal for engineering software. Flexibility is at the center of the offering and will continue to make convenience and ease of access the main draw of the SaaS offerings.
“We’re going to continue exploring how we can align value with usage and aim to attract different types of customers,” White says. “Some customers may take advantage of one product, like Fusion 360, and realize that with Flex they can also use Inventor. Looking ahead, we also plan to roll out new products that only fit into a consumptive model because we know that some of our customers are leveraging our tools at a smaller scale and crave that flexibility.”
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About the Author
Jim Romeo is a freelance writer based in Chesapeake, VA. Send e-mail about this article to [email protected].Follow DE