(By Joe McKendrick)
“This is probably as close as it gets to the old model for buying software — pay one huge sum up front and get it for life. A perpetual license is the Cadillac of cloud service plans, typically bundling in maintenance, support and other professional services. “Traditional perpetual license models are structured as an upfront payment with 18-‐25% for ‘maintenance and support’ plus professional services.”
In times gone by, people and organizations paid IT vendors for something tangible — be it server boxes or software on a disk. Now with the cloud, IT is no longer a product, it is a service. And as with any kind of service, software has become an intangible that requires ongoing payments.
There are a bunch of ways to pay for cloud or Software as a Service — and the industry seems to still be in search of the best formula for attracting and keeping customers. But for now, cloud and SaaS vendors have settled on four basic models.
Byron Deeter, partner with the venture capital firm Bessemer Venture Partners, recently co-authored a paper that reviewed the top pricing models, exploring how each model has evolved, and what’s in it for the customer:
Freemium model: This business model seeks to lower barriers to entry for online offerings by offering some core services at no charge, then charging a premium if the customer wants to upgrade to something more sophisticated.
Vendor examples: DropBox, EverNote, LinkedIn
What’s in it for the customer? This approach shifts a great deal of risk to the service provider, who may attract a lot of users, but needs to compensate for free services with customers seeking to upgrade. The services offered for free are likely to be consumer-grade and too lightweight for organizations to run their businesses.
What’s in it for the vendor? The ability to pull in a critical mass of registered customers, a percentage of whom will eventually open their wallets.
Consumption model: This is the classic, metered, “pay-‐as-‐you-‐go” offering seen with many cloud services.
Vendor examples: Amazon Web Services, Twilio.
What’s in it for the customer? The pay-as-you-go model enables customers to add and delete services on demand, typically with no penalties or additional fees. The approach is “valuable for companies that are at the early stage of ramping up their need for a particular product and anticipate greater future usage,” according to the report.
What’s in it for the vendor? This model enables a vendor to not only directly target customer needs, but also upsell new and existing services, Detter and Jung state.
Tiered pricing: This is the most common model for enterprise SaaS, and has its roots in the dawn of enterprise software in the 1980s. The pricing tiers are typically tied into a metric, such as number of seats, modules, data volumes, and servers.
Vendor examples: Salesforce.com, HubSpot
What’s in it for the customer? For customers who expect significant growth in the future, as their organizations and demands increase, their needs will evolve, and they may opt to move up the tiers. “Part of the sales process is demonstrating that the customer’s needs can be met both in the present and in the future through higher tiers that it can ‘graduate into’ over time,” Deeter and Jung state.
What’s in it for the vendor? This model helps build long-term relationships with customers.
Perpetual license model: This is probably as close as it gets to the old model for buying software — pay one huge sum up front and get it for life. A perpetual license is the Cadillac of cloud service plans, typically bundling in maintenance, support and other professional services. “Traditional perpetual license models are structured as an upfront payment with 18-‐25% for ‘maintenance and support’ plus professional services. ” Deeter and Jung note that such plans have be superseded by subscription models in recent years.
Vendor examples: Oracle, Microsoft.
What’s in it for the customer? Deeter and Jung recommend a perpetual license approach to enterprises that intend to remain with a service for the long haul — greater than three years. “Additionally, there are possible tax implications for capitalizing the license as opposed to an annual expense.”
What’s in it for the vendor? This model enables a vendor to lock in longer-term contracts.
“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”