Business

The right licensing model could make all the difference

By Isuru Senadheera

Product licensing in software products is one of those strategic imperatives that, if it doesn’t work well, quickly becomes a top focus for any CEO. 

In digital products, licensing is how you exercise your pricing strategy. Poor licensing management can lead to revenue leakage, operational inefficiencies, and user dissatisfaction. Throw in a highly-competitive market climate, and your product pricing and licensing models are forced to adapt. Otherwise, you will face reduced profits and lose market share. 

By implementing a successful software product licensing solution, you will have the necessary tools to drive product adoption, improve the buyer experience, optimise the support process, and maximise revenue at the end.

Licensing models change how organisations and individuals purchase and use digital products. You must understand how your customers think when they buy from the product portfolio you offer them. Given the recent evolution of software licensing models, it is increasingly necessary to keep customers abreast of what’s available and provide them the transparency to make the best purchasing decision. 

Let’s try to understand some traditional licensing models first.

  • Perpetual Licence: A perpetual licence is a widely used licensing model where a digital product is sold once, and the licensee can then use the software forever. (e.g., Microsoft Windows licence).
  • Floating Licence: A floating licence allows you to define a specific number of permits to product instances shared among a particular group of people.
  • On-Demand Corporate Licence: This licence combines aspects of other licences to create flexibility for the software publisher, especially when dealing with large enterprises including support and maintenance; e.g., licensing a human resource management solution for an enterprise.
  • Academic Licence: An academic licence isn’t a distinct licensing model. Rather, it is provided to a specific audience. It is a widely used model to capture future markets by creating loyalty. E.g., student licence for Microsoft Office software.

Traditional licensing models often yield high up-front costs for customers. In contrast, pay-as-you-go (PAYG) models allow users access to the software they previously could not afford. 

Gartner’s research identifies that with the widespread adoption of software-as-a-service (SaaS), all new entrants and 80% of historical vendors now offer PAYG based business models. These SaaS offerings often by design have lower customer acquisition costs (CAC) than traditional offerings. PAYG models also yield recurring payments from a larger user base that enable a stream of cash in-flows to fund continuous product improvements.

Let’s have a look at common PAYG models.

  • Subscription Licence: This is a popular model, where the end-user licences the product repeatedly for a defined period. It could be for per user, per group of users, or even per concurrent user.
  • Feature Licence: Used to limit the availability of a specific feature of an application. It can be combined with other licensing models. E.g., in-app purchases, different pricing tiers as economy/professional.
  • Trial Licence: A trial licence is a limited licence i.e., for a fixed duration, limited features or usage limits, but the main difference is that prospective users are allowed to try out the product before purchase.
  • Freemium Licence: The freemium model is widely used and follows the same rationale of a trial licence: you offer users basic or limited features at no cost and then charge a premium for advanced features or product support. It gives a head start in acquiring a large set of initial users without forcing a purchase. These users may not purchase upgrades at once, and you can still collect data and insights, earn ad revenue, and boost business numbers to continue to enhance the application. However, if the freemium model is managed poorly, you will end up with many free users who never convert to paid users.

So now that you are aware of these standard software product licensing options, how do you choose the right one? Follow these three steps:

  1. Revisit your business model, product value proposition, target market behaviours, and pricing strategy from a product strategy perspective. 
  2. Research on licence models that you think best corresponds to the way you want to licence your application. You can run more than one licence model at a time! For example, Adobe offers a mixture of many licensing models to choose from on its products. Ask the right questions, such as how can you ensure recurring revenues in the case of pay-as-you-go licences? Will enough free-tier users be converted in the case of the Freemium model?
  3. Combine high potential licence models and address any constraints to those models. (e.g., market constraints, product architecture). Plan for rapid market capture tactics such as affiliations and volume-based discounts assessing estimated revenue against financial goals.

Remember that the licensing models should evolve continuously to serve market changes. The preferred licence model needs to be flexible, configurable, and support discounts and refunds.

Once you select the preferred licensing model, the next challenge is to implement these provisions in your products. Sophisticated licensing models require technology provisions such as feature toggling, traceability, licence management systems, and payment gateway integration built into the product itself.

A proper software licensing solution allows us to enable the licensing model in your product. The software licensing solution ensures that the customer can only use the product on those specific licence terms. You must decide whether to build a licensing solution or integrate it from a third-party vendor? It is always good to look for modern licensing management software unless you have sufficient resources and competencies to build the same in-house.

Compared to bespoke software, licensing is one of the many things to consider when building a generic software product intended to compete in the market. The community built ‘Winning Product’ knowledge model (https://www.winningproduct.com) addresses all the areas you need to consider when launching a digital product.

About the writer

Isuru Senadheera is a Technical Architect at 99x where he leads product management practises among software development teams. He counts over 12 years of industry experience in software product design and engineering. He is also a member of the Corporate Leadership team at 99x and the Regional Development Forum of SLASSCOM. Isuru holds a BSc from University of Moratuwa, Mini-MBA from Colombo School of Business and Management (CSBM) and is currently reading for his MSc at Sri Lanka Institute of Information Technology (SLIIT). He is an associate member of the Institute of Engineers Sri Lanka (IESL) and a member of Institute of Management of Sri Lanka (IMSL).