Subscription Vs Licensing: Which is better for Your SaaS

Software as a service (SaaS) companies have transformed the way businesses use software. Instead of buying and installing software on local machines, SaaS companies offer software applications that are hosted in the cloud and accessed through the internet. This model has several benefits for businesses, including lower upfront costs, reduced IT complexity, and improved scalability. However, when it comes to pricing models, SaaS companies face a critical decision. That decision is whether they should offer perpetual licenses vs. subscriptions.

Perpetual licenses

Perpetual licenses are a one-time purchase that grants the user the right to use the software indefinitely. The user pays a fixed upfront fee, typically based on the number of users or installations, and can use the software as long as they want. This pricing model has been popular for traditional software vendors, as it offers a predictable revenue stream and ensures that customers pay upfront for the software.

Perpetual licenses for SaaS companies

For SaaS companies, perpetual licenses have some advantages. They offer a clear revenue stream, as customers pay upfront for the software. This can be helpful for companies that need to secure funding or meet revenue targets. Additionally, perpetual licenses can be attractive to customers who prefer to own their software and want to avoid ongoing subscription fees. However, perpetual licenses also have some drawbacks for SaaS companies. First, perpetual licenses require a larger upfront investment from customers, which can make it more difficult to acquire new customers. Additionally, perpetual licenses can create revenue volatility, as revenue from new sales will be unpredictable.

Subscriptions

Subscriptions are a pricing model where customers pay a recurring fee to access the software. This fee can be monthly, quarterly, or annually, and is typically based on the number of users or installations. With a subscription, customers can access the latest version of the software and receive ongoing support and updates.

Subscriptions for SaaS companies

For SaaS companies, subscriptions have several advantages. They offer a predictable revenue stream, as customers pay on an ongoing basis for the software. This can make it easier to plan and forecast revenue, which is important for SaaS companies that need to manage cash flow. Additionally, subscriptions offer a lower upfront cost for customers, which can make it easier to acquire new customers. Subscriptions also have some disadvantages for SaaS companies. They can create revenue churn, as customers may cancel their subscriptions if they don’t see enough value in the software. Additionally, subscriptions can be less attractive to customers who prefer to own their software and want to avoid ongoing fees.

Perpetual license vs Subscription

The choice between perpetual licenses and subscriptions ultimately depends on the specific needs and goals of the SaaS company. There are several factors to consider when making this decision. Ultimately, the decision between perpetual licenses and subscriptions will depend on the specific needs and goals of the SaaS company. Companies should consider factors such as customer acquisition cost and revenue stability. They should also consider customer retention and product development when making this decision. Additionally, it’s important to consider the competitive landscape and the preferences of the target market. In some cases, a hybrid pricing model that combines elements of both perpetual licenses and subscriptions may be the best approach. Another approach is to offer multiple subscription tiers that cater to different customer needs. Regardless of the pricing model chosen, it’s important for SaaS companies to communicate the value of their software to customers. This can include highlighting key features and benefits, offering free trials, and providing excellent customer support.