Transitioning to Subscription Licensing

Subscription software licensing is gaining traction in nearly every business sector from e-commerce models to enterprise business applications to niche vertical software solutions. In IDC’s Worldwide Software Business Model (Subscription and License) Forecast 2022-2026, IDC research director Mark Thomason noted: "The trend for software companies to adopt the subscription business model continues to grow quickly, at 17.9% 2021–2026 CAGR, and is forecast to represent 87.4% of total software revenue by 2026." That seems to be a strong indication that subscription software licensing will be the model of choice for the future.

Online merchants have readily adopted the subscription model for their e-commerce businesses. According to a 2021 survey, Ravelin, a British fraud prevention organization, predicted that 75% of all consumer brand online merchants plan to offer a subscription service by 2023. As you would expect, as the subscription model evolves, there will also be fraudulent activity associated with it, whether intentional or unintentional, and that will need to be addressed to keep profits flowing. Ravelin’s Subscription Merchant Report 2022, based on a survey of 1700 fraud professionals, pointed out some of the fraudulent activities experienced in the entertainment/streaming services, physical goods delivery, and other non-physical goods industries, all using monthly or annual recurring payment models.

The report noted the top fraud risks associated with subscription merchants:

• On-line payment fraud, e.g., use of stolen credit cards to make purchases.
• Account takeover, e.g., for some businesses, credit can build over time and those accounts become prey for attackers.
• Friendly fraud, e.g., recurring payments invite unnecessary disputes, as customers can easily forget they subscribed or forget to cancel after a trial.
• Refund and promotion abuse, e.g., customers could easily claim their box ‘never arrived’ (even though it did) to get a refund and keep the goods for free.

These are just a few of the most common commerce attacks on subscription business that if not monitored and preventive measures taken can result in a significant drain on revenues and profits. And while online merchants were the early adopters of subscription-based commerce business, they are also early identifiers of the potential pitfalls for others who may venture into subscription-based business.

Many ISVs, for example, are now moving away from the perpetual license to more modern consumption-based and subscription license models. Like the online subscription merchants, ISVs selling enterprise software applications should expect to encounter similar hurdles as they enter uncharted waters for commercializing their application with recurring payments.

Subscription models come in all shapes and sizes, and the relationship they create between vendor and user can take many different technical forms. The process can seem quite complex when you start considering management of things like temporary licenses, unlimited licenses, transferred licenses, canceled licenses, and even lost licenses. Renewal mechanisms and expiration rules can vary, reminders need to be sent and managed, and the entire licensing process needs to be seamlessly integrated with existing ERP and back-office processes without causing major disruptions in customer relationships.

What can ISVs do to ease the transition to subscription licensing? Here are a few thoughts:

• Identity and access management: companies need to clearly define and manage user identity and access policies with the ability to review account access, enforce multi-factor authentication, and quickly provision or revoke access.
• Ease of use: the subscription process, automatic renewals, cancelations, license transfers and other aspects of the end user license must be understandable and extremely easy to manage by the end user.
• Back-office automation: companies need the ability to distribute and manage licenses (or entitlements) transparently and effectively, ideally in an as automated fashion as possible and seamlessly integrated into existing back-office systems.
• Code security: With growing concerns over data breaches and cyber threats, ISVs need to increase their emphasis on security. Code needs to be locked down using modern cryptographic methods to prevent illegal copying, reverse engineering, or tampering.

If you are considering moving to a software subscription model, a flexible licensing platform will make all the difference in your abiliity to set up and implement the process that's best for your customers and easy for you to manage. We have helped many ISVs move to a subscription licensing model using CodeMeter License Central, our database-driven license and entitlement management solution that automates the process of creating, delivering, and managing software licenses. Additionally, the new CodeMeter License Portal offers a self-service platform for OEM partners and customers to simplify the management and handling of licenses. This leads to lower process costs on the ISV side and to higher flexibility in managing licenses in the field.

To learn more, you can view our recorded Webinar, Subscriptions: Relationships Built to Last, that presents the basic foundations of subscription model and demonstrates how to configure and implement your own subscription model using CodeMeter License Central.