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Review and Adjust Your Software License Models for Increased Product Line Profitability

By May 18, 2011Article

The software license is the life blood of all software companies – it’s the primary vehicle by which they package value into commercial units. In addition, small changes to license models could have big effects on the bottom line, as the cost to change license models (and the associated revenue stream) can often be done with little or no cost. As a result, it makes sense to periodically review your license portfolio every few years, similar to the way you may frequently revisit and revise a personal financial plan. In some cases, we see companies who offer the same license models they did over 10 years ago, without seriously considering if they need to change.
Some of the drivers behind determining whether or not it is time to make software license model changes include:

  • The need to simplify licensing due to years of M&A.There was a widely circulated article by a CIO a few weeks ago describing the difficulty buying a solution from a software vendor because of all of the different metrics used to buy a solution. Some of the license metrics were priced on CPU, some were priced on named user, while others were priced by concurrent users. Overly complex product lines can lead to revenue loss as a result of channel confusion, which makes it easier to sell competitive solutions and customer dissatisfaction, which can lead to discounts. Compliance operational costs may also be higher.
  • Change in computing environment.With the widespread adoption of portable computers, virtual machines, cloud computing, and Software-as-a-Service (SaaS), compute environments are more complex now then even a few years ago. Depending upon how these technologies apply to your software, it’s possible that without a change in license model, customers are using more software than you intended when the license model was developed. In addition, the license model may need to be adjusted to embrace more of a pay-per-use type of model if your software is able to embrace cloud computing and/or virtualization to deliver more value.
  • Change in buying patterns and customer composition.Over time, companies begin to take advantage of their multinational status and internal processes to require a larger or more customized license buying program, which may change the way the underlying software is licensed.
  • Change in competitive landscape. Sometimes competitors offer new license models that customers embrace, forcing the market to adjust.

A good indication of how well your metrics are performing is to look at discounting and market-share variance and determine if inadequate software licensing could be the root cause. It may be more effective and simpler to change your license model than to change your product. Another indication of the need for change may be your corporate “emotion” over new technologies such as cloud computing and virtualization. If you feel paralyzed, or, if you find yourself avoiding these new trends, it may be time for an assessment and audit.
While auditing your license models is a sensitive topic, it doesn’t have to be a daunting one.
To facilitate ongoing software license excellence and incremental revenue streams, organizations can begin by creating (if it doesn’t already exist) organizational leadership for pricing and licensing, through the development of license policies and basic principles, all of which are designed to ensure the ongoing optimization and leadership of software licensing excellence.
If what you need is a “tune up,” there are auditing tools to help software vendors review and adjust their software license revenue models and metrics, as well as create license policy frameworks to help guide the incorporation of new license models into a profitable product portfolio.
Cris Wendt is the Principal Strategy Consultant at Flexera Software.
This blog is reposted with permission.