Consumption-Based Licenses

It is a story many of us have experienced in some form or another: In my college dorm, we did not have laundry. Instead, there was a laundromat on campus where all students could go to get their laundry done for a sum that even the poorer ones of us could afford. When one of those big washing machines broke down, it would be replaced. Would it have made financial sense for me to buy my own machine in that case? Most likely not. Would it have paid off to pay for a laundry service to do my laundry whenever I needed it, for some form of monthly payment? It might have, but then there were the months that I did not spend on campus. In the end, I was actually quite happy that I did not have to worry about moving a big old washing machine from my dorm room up on five flights of stairs.

It is the same story with software. How much is software worth? Does it make financial sense for us to buy a certain application? There are no blanket answers to these questions. The same software is not worth as much to one user as it is to another. It depends on the particular situation and how well the software on offer fits the actual use case. How often do I need to use it? Are there alternatives? Even the best software in the world is not right for me if I cannot afford it.

All of this makes pricing policy a crucial decision for vendors. Too high a price, and nobody will buy the product. Too low, and you lose money with every sale. A true win-win outcome can only come about if the needs of the customer and the needs of the vendor are balanced.

Licenses make pricing flexible: Prices can be adjusted to fit the needs of customers, and bespoke solutions can be tailored to attract any type of target group.

One way of approaching this concept is Consumption-Based Licensing, or CBL for short. This article will look at CBL, how it differs from other models, and its benefits and risks. It will also explain who CBL is a good choice for and how easy it is to sell software with custom CBL models.

What are Consumption-Based Licenses?

Consumption-Based Licenses are what is called a recurring-revenue model. Colloquially, they are also known as pay-as-you-go licenses. They are based on consumption in the sense that the users only pay for what they actually use.

Everybody knows the concept from e.g., paying for gas: Nobody wants to pay more at the pump than they got. Prepaid cellphone contracts are another type of consumption-based pricing: The customer gets a certain data contingent on usage and can increase it when needed. CBL can also be combined with other types of licenses. To stay with the last example, some cellphone contracts require a monthly payment on top of the data package. For Infrastructure-asa-Service providers (IaaS), CBL is becoming an increasingly attractive option. Users can e.g., buy additional server capacity when a limit is reached, or there are no limits, but the actual amount of data is tracked and must be paid for.

How do they differ from perpetual and subscription licenses?

CBL are quite unlike other types of licenses, like conventional one-off perpetual licenses or subscriptions.

With conventional licenses, the user pays once for the software and either becomes its outright owner or gets an unlimited, unrestricted license. In many cases, this is combined with a maintenance subscription. The traditional model is still the norm in B2B business, but it is fast falling out of fashion for consumers because of its drawbacks: There is no incentive for the developer to keep improving the product, and the upfront cost can be a too high threshold for some people.

Subscriptions are the more flexible option. With them, the user does not buy the software outright, but instead pays for a temporary right to use it. As long as the subscription is not cancelled, it keeps getting renewed, and the user can go on enjoying the software. For private consumers, this has become quite normal. Spotify, Netflix, or Adobe are just some of the big names in the market offering monthly service subscriptions. The advantage over a perpetual license is the lower entry threshold for new customers. And they receive a product that is always kept up to date. In turn, the providers have an easier time with attracting new customers and a steadier, more predictable cashflow. Subscriptions have proven their power as the fitting solution for balancing customer loyalty and generating revenue with the needs of the end user in mind. The model is the right choice in particular for products that work with regularly updated content.

Why do I need CBL? What are its pros and cons?

In many cases, CBL can be the ideal choice for customers and vendors alike. This holds true in particular when the key factor is maximum flexibility in terms of volumes, usage periods, or the time of use.

Before going with a CBL model, one should consider whether a different model is a better fit to the specific conditions and requirements on the ground. Power users might benefit from paying for a full, perpetual license. Subscriptions might be better if the product is used steadily and regularly. CBL might be the best choice when flexibility is paramount.

The costs can develop in very different ways depending on the chosen model. The chart shows how perpetual licenses mean high upfront costs that stay the same over the entire period. A subscription comes at an initially low cost, but that cost is incurred repeatedly at regular intervals, whereas the costs of a CBL license would change and develop in response to the actual use. It is easy to see how the choice of licensing model depends on the needs of the user.

To return to our initial example: Neither uying a washing machine nor paying for a laundry service subscription would have made sense for me. The machine (or the service) would have gone unused during vacations or semesters spent abroad. Paying for actual use, i.e., for the laundromat, was the ideal choice for my flexible and changing demand for fresh laundry.

Companies can often benefit from CBL models. If there is no upfront fee at all, there is essentially no risk to it, and the entry threshold is minimal. If the software is not used, you do not actually pay for anything. The software would typically be used when this promises a benefit that outweighs the cost of paying for it. In a sense, the software pays for itself during use. This makes CBL an easily calculated choice, as it links the investment directly with the gains. Flexibility and scalability are the great advantages here.

For companies whose demand and needs change by the season or with every project, CBL are a way to manage their cost situation by avoiding the need to spend money for software that is not used when the business is slow. And when things pick up again, the software is there, waiting to be used.

What do I have to do to offer CBL? What can Wibu-Systems do for me?

Wibu-Systems gives you an extremely easy way to sell your software with a consumption-based business model. Our CodeMeter License Central lets you cover all conceivable scenarios: Do you want to bill your clients for the period of use, or for the times that they use a certain feature? All this is easily done with Wibu-Systems technology.

You can learn more by watching the replay of our masterclass How and Why to Create and Sell Consumption-based Licenses or by contacting our sales team, who will be happy to advise you.

Conclusion

CBL are an exciting way of getting your software into new markets and to new users with modern, flexible, made-to-fit licensing models.

 

KEYnote 44 – Edition Fall/Winter 2022