The benefits of the software license revenue model

Could you even imagine that only in the last 15 years we went from owning things to using the software license revenue model – the new king!

In this article, you will find out what are the biggest advantageous of using the software license revenue model.

But how it all started?

In the beginning, there wasn’t internet. The companies sold their programs or games on a floppy disk (I owned games on floppy disk :)) and then when the technologies improved, moved to CDs.

I still remember how proud I was to own 1.33 GHz thunderbird processor at the time. In comparison, every phone nowadays has a stronger CPU.

After that, the technologies improved, and we saw the rise of the DVD technology where the user could store 4GB and more data.

But even then, the majority of vendors shipped their product with a license code on the CD or DVD, and they expected from the user to fill it in during the installation process. Later on with the improvements of the internet, a lot of companies introduced verification over the internet process. This ensured that the pirate copies will decrease. Because at that time the cost of a CD or a DVD burning device dropped significantly.

It seems like the entire tech industry was again reactive to the changes happening, just like the flash technology eventually the role of using more verification and other services over the internet was inevitable.

What shifted?

The biggest reason which escalated the change of the business model was the big flops happening over and over again. Microsoft introducing Encarta encyclopedia, which failed to compete with constantly changing and evolving Wikipedia.

Microsoft Windows Millennium and Windows 8, which took years to develop just to be thrown like a garbage and rejected by the users and many more examples.

The end customer become more sophisticated, and they demanded more from the vendors.

On the other side, the internet become widely spread and millions and billions of people had easy and cheap access to it.

The combination of Agile mindset, focus on constant input by the customer through the Internet medium, made the software license revenue model possible.

What are benefits of the software license revenue model?

Now, we will explore what are the benefits of this model and why Microsoft and so many other organizations are switching to it?

Cost savings

It might seem counterintuitive, but there are a lot of cost savings involved once you switch to this model, and there are many reasons for that. A lot of corporations combine this model with community forums where like-minded users help each other when a problem occurs. This is the one part of the equation. The other part of the equation is the cost-saving for the end user. They no longer need to know how to install or maintain the software, since everything is hosted by the vendor. Over 10 years ago, in SAP there was the discussion that a lot of money and costs goes to the integrators of the SAP software and how this made the product costly. Also, it increased the amount of time needed to be integrated to the customers’ environments.

Therefore, cost saving can be considered not only the direct measurements of time but also the hidden costs such as maintenance, integration, speed, and security support.

Immediate Feedback from the customers

Remember the previous examples with big corporations investing years to develop a product and features that no one wants. By implementing Saas(Software as a Service), the companies receive immediate feedback, which features are useful and which not. Some companies, like Facebook, use the following strategy. Tehy enable particular new feature to a small segment of customers and only when they receive a positive feedback, they enable it for the rest. Otherwise they discard that feature altogether. The motto here is fail fast and fail often.

Predictability and budgeting

The companies need a revenue stream to plan their resources and people. In the past, it was up to the marketing and the financial department to provide a forecast analysis of how much money a product will generate. This is still true with the hardware we purchase. Look at all the phone manufacturers such as Apple, they plan their sells based on historical data and marketing research. This is still like gambling. A lot of time, the manufacturers are close to the expected demand. But if they failed with their prediction, the consequences can be severe. On the other side, the Saas process is relatively predicable and after the initial spike of new customers, the accounting and marketing department can better allocate resources and money and project far better the growth opportunities.

It is the new norm

Something that was unheard 10 years ago, where we bought CDs with music and owned it and exchange it with our friends, now is unheard. The majority of people use Spotify or another music service and are gladly paying for it. And it is significantly cheaper to have access to all the latest music releases, versus constantly buying and storing the music on your hard drive.

The new norm is convenient and a practical way that helps all of us to not only listen to our music, but be closer to each other, by creating and spreading our favorite play list or watching together Netflix series.

Summary

Software license revenue model is here to stay. There are many reasons why now it’s the time to re-think your software strategy and move to cloud offering.

Your product will be closer to the customers, you will receive immediate feedback, and if done right, you might actually save some money from the support.

The new norm is the current norm. What do you think will be the next evolution of the Software business model?