A Primer on The Most Popular and Effective Software Licensing Models For Maximizing Revenue
What’s one thing that nearly all businesses, across all industries, have in common?
It doesn’t matter if you work at a large corporation or a small start-up, whether your company is B2B or B2C, or if you sell hardware or software, all companies are constantly looking to sell their products and grow their business. You need a way to differentiate yourself from your competitors, and in 2020, that means placing a premium on satisfying your customers in meaningful ways.
What needs to be top of mind is selling your product the way customers want to buy. These days, most industries are buyer’s markets, and solutions that offer the flexibility that consumers have come to demand, have a better chance of standing out from the crowd.
If there are two ice cream shops in your town, an outdated one that only sells vanilla or chocolate, doesn’t allow for any customization, and doesn’t even have waffle cones, and another parlor that has forty one flavors, dozens of toppings, and the ability to pre-order and pay on an app, it’s hard to imagine Ye Olde Fashioned Scoop Shoppe staying in business for too long.
When it comes to selling software or any internet-connected hardware device, it’s really no different. And that all-important flexibility, and customer satisfaction, can be achieved through software licensing.Done right, cutting edge software licensing enables you to capture new revenue opportunities while keeping your existing customers from churning.
Software licensing creates flexibility – something your customers and the changing nature of the digital marketplace demand. It’s the gateway to implementing subscription-based billing models and securing recurring revenue. It’s the tool that allows you to diversify your products and packages and create maximum profits from your existing offerings, the secret weapon that helps you distinguish yourself from your competition. In short, innovative and creative licensing models are what fuels digital business transformations.
Let’s take a look at some of the most common licensing models, and explore how they enhance the customer experience, increase business agility, and create the opportunity for revenue acceleration.
What It Means – Think Salesforce, Spotify, or the Gsuite. With this software licensing model, instead of a customer buying your product once, and never actively interacting with you again, they subscribe to your service. Users subscribe on a time based-structure, most often month-to month or annual, with discounts for annual purchases or more seats. You could, however, get as granular as you need, offering daily or weekly subscriptions, depending on what your customers need.
How It Drives Revenue – The subscription billing model is the most straightforward path to the golden egg of profit— recurring revenue. The more customers you have in your subscription model, the more you can rely on a set amount of income each month. When you can anticipate revenue, you can achieve healthy business growth.
The subscription model also completely revamps the customer relationship and creates endless opportunities to increase customer lifetime value. When you transition to subscription-based licensing, you have an ongoing relationship with your users. You can upsell, cross-sell, offer new product variations, and create new entitlements simply and effectively. The active and dynamic nature of subscription-based licensing boosts customer trust, satisfaction, and loyalty—and helps you identify problems such as churning customers earlier than before
Why Users Love It – Customers want to be able to predict and control their spending, and nothing is better at fulfilling that need than subscription-based licensing. Subscription-based billing simplifies budgeting. It keeps payments small and predictable, and moves them from capital expenses to operating expenses—a major gain for some companies. It lets growing businesses acquire critical support software even if they don’t have stockpiles of cash to invest. Additionally, subscriptions give users a no-hassle way to scale up, down, or even cancel if they are not satisfied with the service.
What It Means – Digital transformation has led to the advent of cloud computing, and with cloud computing has come cloud licensing. Unlike the old days, when licenses physically connected hardware and software, the cloud cuts the cord — making software accessible from any device, anywhere there’s an internet connection.Cloud-based licensing means that your software is hosted in the cloud, saving your customers the costs of IT, infrastructure, and hardware. Rather than expensive and time-consuming updates, cloud-based licensing enables simple upgrades with fewer headaches for everyone involved.
How It Drives Revenue – To achieve maximum revenue from each customer, you need to be quick on your feet, and the cloud is a key factor in agility. It allows you to offer new, instantly accessible products, features, and packages. Cloud-based licensing can enable you to streamline processes, enabling effortless and automatic updates and upgrades. Plus, with cloud-enabled access to data, you can use real data on how your software is being used to make roadmap decisions, pricing adjustments, and marketing strategy improvements.
Why Users Love It – Cloud-based software is easy to use, often less costly per month, and creates an unmatched streamlined experience. With cloud-based licensing, clients who purchase your software can instantly enjoy the solutions you provide. They don’t have to invest in IT infrastructure to host your product. If you enable it, they can utilize self-service options to upgrade, downgrade, and troubleshoot problems. And in a world where users are rarely tethered to a desktop computer, cloud-based licensing can enable users to access your software from any device, any time there is an internet connection.
What It Means – If you are selling software, your customers will frequently need to purchase more than one copy of your product. Concurrent software licensing permits allows a group of users to share multiple licenses, so that businesses can buy and manage bulk license purchases. With concurrent licensing, a customer who owns 1,000 licenses can set up their system so that several hundred users can use the system at the same time, potentially saving them money. Concurrent licensing works best as an addendum to other licensing models—sort of like an added bonus of flexibility on an existing license.
How It Drives Revenue – Offering concurrent software licensing shows your customers that you are committed to serving their needs. That could make them less likely to churn, as they are able to use their software as they need. When customers know you are a partner in their growth, they become loyal fans and your most profitable customers. Concurrent licensing has one additional benefit: it lets you plug a high-risk area for revenue leaks— unauthorized use. Concurrent licensing gives users a simple way to obtain multiple software seats, thus reducing the chances they will use your product without legally purchasing it.
Why Users Love It – Concurrent licensing saves businesses time and money. It makes managing multiple licenses easy, and because vendors often offer reduced rates for concurrent licenses, it’s more cost-effective than buying multiple versions of the same software.
What It Means – Feature-based licensing refers to licenses that customers can buy which divide your software into feature specific products or packages. It’s a highly-customizable type of license – customers can purchase licenses that include the features they use but do not include aspects of your software that they don’t need. This form of licensing is often used together with subscriptions, concurrent licensing permits, and more.
Think of standard licensing like a restaurant with hamburgers on their menu. Instead of only offering a plain burger, with feature-based licensing, you can also charge separately for the bacon, the cheese, and the hamburger, allowing customers to build their own perfect burger, rather than forcing them to pay for the full package, especially if it includes features they’re not interested in.
How It Drives Revenue -When you offer feature-based software licensing, you send a clear signal to your customers that you are committed to meeting their needs. No longer do they need to pay for a large bundle of software if they only need a few features—they can pay for what they actually need. Feature-based licensing enables you to dissect your software offering and monetize features individually or in groups. If feature A is more expensive than feature B, but sells much better, do you need to raise the price? If package A+B is one price, should A+B+C be priced at 20% more, or 50% more?
With the targeted price adjustments made possible by feature-based licensing, you can transform your product’s niche features into your biggest profit generators. You can even test new features, offering them for free or at a reduced cost for a period to see how they resonate with customers.
Why Users Love It – You make your customers happy when you offer a product that solves a problem for them. You make them even happier when you don’t make them pay for the features in your product that aren’t relevant to them. Feature-based licensing gives customers control over their software purchases by breaking down the offering into more relevant, often less expensive packages.
What It Means – Seat-based licensing works by limiting specific features to a select number of users. For example, a customer might purchase 100 licenses of your CRM software, but only ten seats can access the email marketing feature. This way, you can make premium features available, even if they are only needed by certain users, or at certain times.
How It Drives Revenue – With seat-based licensing, you can assign increased value to some of your niche features and properly monetize them. Seat-based licensing also allows you to diversify so that your product can become more valuable to more potential customers. This licensing model is particularly important when you are targeting enterprise-grade customers.
Why Users Love It – Customers who do not anticipate more than a handful of users needing the premium features look for the seat-based option. It gives them access to the features they need, while keeping costs down.