View from the Edge
Software Licenses: Perpetual vs. Subscription
In today's world, subscriptions have become an essential part of our lives. Entertainment. Streaming. Phones. Cars. Meals. Groceries. Clothing. Personal care. Pet food. You name it and you can get it through a subscription.
Energized by COVID, subscriptions are expected to reach $1.5 trillion by 2025 according to UBS.1 During lockdowns and in our remote/hybrid work era, subscription-model businesses flourished. The rapid adoption of 5G is only turbo-boosting the subscription economy. Subscriptions satisfy our need for flexibility in how we consume things at home — and at work
We consume goods and services daily through subscriptions without a second thought. However, the case for subscriptions can become muddled in the corporate world — especially in the realm of software licensing models. Hopefully, this article will impart a little clarity as to why subscriptions are just as appealing in the IT world as in the consumer world.
What's the Difference Between Perpetual vs Subscription Licensing
With perpetual software licenses, you buy your IT software license outright. With a subscription, you don't. With a perpetual license, you make a long-term commitment to that software provider. With a subscription, you give the relationship a go for a specific time period, such as a year.
|Perpetual License||Subscription Services|
|Payment||All Up Front (CAPEX)||Monthly or Annual|
|Term Options||Support/Upgrade Only||Software & Support/Upgrades|
|Tax Benefit||Depreciated||Entire Cost|
The benefits of a perpetual software license is that you own it. You bought it upfront and have infinite usage rights. That means full control and management of the system, typically installed on your premises. While you have a large initial investment, using a CAPEX model, you depreciate that investment over a number of years. To keep your IT system in top operating form, you'll typically be required sign up for a support/maintenance agreement.
One of the disadvantages of a perpetual license is also that you own it. If you want software upgrades to your system or any other changes, such as to increase the number of users, it's up to you to make it happen and incur any associated costs such as an additional capital investment in hardware. If you don't make software upgrades, there is a great risk that you'll miss critical security patches, software fixes, and upgrades. Without continuous software upgrades, licenses and hardware may become obsolete and unsupported by the manufacturer. Another major risk is that downtime and system outages are your responsibility. Also, when purchasing, you need to set the number of users upfront. That means you run the risk of not having enough user licenses or having user licenses sit idle.
With a subscription software license, as the name implies, you don't own the system or control it, but use it for a defined period of time. Non-ownership may be a disadvantage to companies that want to keep all control in-house. For most organizations, the benefits of a subscription license outweigh those of a perpetual license. With a subscription, you don't need to sign up for maintenance. Basically, software maintenance is included.
There are two primary benefits of subscription licenses: money and technology. Depending on your organization, one may be more important than the other. Additional benefits are listed but not necessarily in order of importance.
- Money. Subscriptions offer the predictability and stability of an OPEX model in which costs are known and can be more easily managed. No initial capital expenditure is necessary. Some subscriptions offer flexibility and can be contracted and paid for quarterly, annually, or based on actual usage.
- Technology. All software updates are provided automatically. You'll get the latest features and security updates without straining IT resources or paying more. It's an easy way to get the latest cloud-based applications as they become available.
- Flexibility. With a subscription you can pick and choose the features you want and need for your operations instead of being given a package that includes services you'll never use.
- Scalability. Easily adjust the number of users up or down as needed.
- IT Resources. With a subscription model, you can alleviate the strain on IT and lessen the demand for resources. With the cloud, updates are automatic. If you need support, maintenance agreements are readily available.
If you're debating whether to continue with a perpetual license or move to a subscription model, there are a few other considerations. One is that the pricing is often the same. A five-year subscription paid over time is generally about the same as perpetual software with five years of maintenance.2 Another consideration is risk. A perpetual license offers the advantage of making a one-time payment versus choosing a route that can't be reversed.
Advantages of Software Subscriptions:
- Usage Flexibility
- Software Updates
Not sure which route is right for you? Reach out to us for more information on the benefits of subscription services. Call us at 855-324-9909 or email us at firstname.lastname@example.org.
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