Implement a Recurring Revenue License Model

Recurring Revenue License ModelFor more predictable revenues, consider a Recurring Revenue License Model.

Software vendors increasingly rely on a recurring revenue license model and other pricing strategies to create steadier revenue streams. These strategies result in smoother and more predictable revenue growth which makes financial planning easier and increases business efficiency, maximizing value to shareholders.

A license manager such as RLM is an essential tool to implement these changes. It enforces license policies that promote higher recurring revenue.

Recurring revenue comes from three main sources:

  • Renewable license fees (subscriptions)
  • Annual maintenance fees
  • Fees based on usage (pay-per-use or consumptive models)

License Subscriptions

Increasingly, software vendors offer both perpetual licenses and license subscriptions. Subscription licenses are priced so that they provide a lower initial cost in order to attract new customers as well as customers who are trying to preserve short term cash. Subscriptions often seem less risky to customers too.  If the product doesn’t live up to expectations, then the customer has only limited financial exposure.

Subscription licenses are renewable licenses, usually annual, including software support and updates during the coverage period. The license is automatically terminated unless it is renewed.

Setting Prices
Prices for annual subscriptions are generally some fraction of the perpetual license alternative.  Many companies aim for a crossover point of 4 to 5 years after which the costs for the annual license begin to exceed the perpetual license fee plus the annual support costs. So, an annual license might be priced at 40% of a perpetual license.

The License Manager’s Role
Supporting the concept of term licenses are license expiration dates.  Days before the license expires, your software can display the number of days remaining. This technique improves customer satisfaction because the user is prepared for the renewal event. When the customer signs up for another term, new licenses specifying the new expiration date can be sent to replace the expiring license.

If you automate license renewal from within your product using an Internet activation solution, such are Reprise’s Activation Pro, the process is seamless.

Support RenewalsRecurring Revenue License Model

Software vendors who rely primarily on perpetual licenses can still use licensing techniques to enforce support renewals to generate higher renewal rates.  Customers are encouraged to renew their support agreements when license managers restrict access to desirable new releases.

A flexible approach is to specify a “latest release date” in place of the product version number in the license. This date represents the maintenance coverage period. In other words, it specifies the latest future software release date that can be supported by this license.  Of course, applications must be programmed to request licenses consistent with the “born on date” of its release.

Pay Per Use Pricing and Post-Use-Billing

Some software vendors offer yet another payment approach – pay per use or post-use billing.  What better way to stabilize your revenue stream than to charge based on actual usage?

License managers produce detailed report logs of license activity, recording data such as: product name, number of licenses granted, user name, host name, and duration.  With this information, you can periodically produce invoices that reflect your customers actual use. Popular license managers, like RLM, write the log in plain text so that it can examined directly. Also, the log is authenticated to ensure data integrity, and can be “anonymized” to address potential privacy concerns.

License managers that are deployed in the cloud, such as RLMCloud, collect the usage data for easy analysis and invoice generation.

Business Advantages

Recurring revenue models:

  • encourage steady, predictable revenue flow to the publisher
  • lower initial cost for the user, and faster approval cycles
  • allow for short-term rentals and faster new feature introduction
  • allow license policy to change at renewal time
  • Limit license exposure to overuse when machines are decommissioned or upgraded
  • let customers expense the budgeted license renewal fees
  • lessen price discounting pressure
  • Encourage tighter client-vendor relationship because support is bundled.

All other things being equal, companies with recurring revenue pricing are valued higher than companies who rely mostly on perpetual licenses. For these companies, revenue recognition is immediate.  It is also easier to weather a bad quarter or flat market. Bundling customer support in the license fee helps to retain customers and boost support renewal rates. Sales compensation can reward new orders at higher rates than renewals, but lower rates than perpetual licenses. Since end customers cannot opt-out of support, customer satisfaction is improved.

The Transition

If your company plans to shift from perpetual to subscription licensing models, expect lower initial growth rates. But, since new customer acquisition builds revenue incrementally on top of revenue base from renewals from previous years, after an initial period of slower growth, revenues will exceed perpetual-only models.

The mechanics of making the transition work may mean modifying your licensing code at the api level in order to handle automatic renewals. Also, your CRM system may need to be coupled more tightly to make sure that renewal orders and cancellations are reflected into your licensing solution. Remember, SaaS is not required for recurring revenue, the delivery model is irrelevant.  You can still sell desktop on-premises applications and gain from recurring revenue licensing models.

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