By May 14, 2021

Which Software Licensing Model Will Maximize Your Revenue?

As most informed software developers are aware, licensing your application comes with multiple benefits such as enhanced security, customer retention, and customer satisfaction. However, what all software engineers and developers alike are wondering and want to know is, what licensing strategy will provide the greatest revenue growth opportunities for their application?

Below are the three most common forms of licensing strategies that have proven time and time again to increase application revenue and have all been used in a large variety of industries. See the pros, cons, and use-benefits of each as well as examples for industries and environments in which they excel.

Usage-Based Licensing

Usage-based licensing is simply providing your end-user an agreed upon number of usages or actions that can be performed through the use of your application. With this form of licensing, you are enabling your users’ full access of the software, but for them to complete an action such as downloading or printing an image, report, or other task, they must have the credits to do so, which can be pre-purchased or bought at the time of the action.

Through usage-based licensing, each action that your end-user needs to complete using your software creates a revenue collection point. When your customers run out of uses, they must purchase additional uses or tokens, which in turn creates an event that generates revenue and ensures payment.

Time-Based Licensing

Also known as subscription-based licensing, this strategy enables end-user access to your software for a predetermined amount of time. Similar to leasing an apartment, car, or office, all dues and fees are paid up front, which secures your investment in your application, and if not paid or renewed, all access to the end-user is revoked.

A big benefit to time-based licensing is that you can determine the pricing for each customer, depending on the leasing period for which they will need access to your application. For example, month-to-month, quarterly, and annual licensing options are the most common.

Monthly licensing generates more revenue collection points, typically higher-priced, but allows customers to cancel their subscription quicker.

Quarterly and yearly licensing options will generally be discounted, as they are more committed to your application and are usually paid in advance, therefore increasing customer retention.

Feature-Based Licensing

Feature-based licensing or tiered licensing is breaking down one all-inclusive product and offering them as unique products. In this form of licensing, you are able to create multiple product offerings at a lower price, increasing the affordability and reach of your product as well as being able to offer each user the exact feature or application they need without any additional costs to them.

Feature-based licensing can be as simple as offering an entry, professional, and expert version of your application, with the cost increasing at each tier as your customer gains more access to software.

With each tier or version, the end-user gains access to all the features of their tier as well as the features in the tiers below. What this means to you is that you can generate multiple revenue streams based on one application as well as generate the additional revenue collection points each time an end-user needs to upgrade to the next tier.

Why Should You Implement a Software Licensing and Security Strategy to Your Application?

There are many different pros and cons you need to consider before implementing a software licensing strategy. So what are they?

Pros

  • Create predictable and repetitive cash flow
    • As the transition from product suites to features smoothens, you are able to not only manage current cash flow but also predict future cash flow as you manage the life cycle, demand, and product usage of your customers.
  • Generate additional revenue
  • Efficiently manage existing licenses
  • Greatly reduce end-user startup costs
  • Increase market share by offering more affordable solutions
    • By offering multiple products based on one application, you become more affordable to those who may not have had the capital to purchase your software suite.
  • Increase support for your application
    • Increase turnaround time as software users require support and easily manage and release customer-specific updates.
  • Ease of integration to update and add new features
    • Rather than having to roll out a new product suite as updates are made, you can easily and efficiently and timely release product updates to reduce costs and keep your customers satisfied.

Cons

  • Amending current business processes
  • Delayed revenue, as it will be recognized over time rather than at onset of new customers
  • Develop new sales strategy, as you are now selling more than one product
  • Sales pipeline may be unstable/unclear initially

As expected, adopting a new and innovative approach to selling your application will have its fair share of obstacles, as you are now undertaking a new sales cycle, marketing strategy, and even support procedure.

As daunting as these obstacles may seem, the road ahead becomes much clearer and more certain as you begin to create new innovative statistics based on your customer base and the products they are purchasing. Adding to your customer insight, develop the applications and software that your market demands, and release it effectively and efficiently as they request it.

What Type of Software Licensing Should You Implement?

software licensing modelConsider the phrase “The water that hardens the egg also softens the potato.” As I wish there were a simple way to wave a wand and tell you exactly what licensing type you should implement, I would be merely shooting in the dark.

However, to determine which licensing type may suit you best, evaluate the following.

Who and/or What Is Your Ideal Customer?

Outline who your customers are. Using data collected by your marketing team, yourself, and other departments in your company, best outline who exactly you are looking to sell to.

Once you gain that customer’s business, what is the duration or customer life cycle for them?

Lastly, are they looking to purchase your software for a one-time use, or are they repetitive customers? And repetitive to you may be completely different from what it is to others, i.e., is repetitive defined as they come back every month, year or five years?

What Market Segment Does Your Product Create Value For?

Identify your ideal customers market segment, what is the turnover like in the market, and how quickly does software become invaluable due to new and improved technology?

You want your application to create value for that market, but if it takes six months to release a product and the turnover of that market is 8-12 months, it will be hard to create a sustainable revenue stream.

Would Your Customers Benefit From Buying Certain Features of Your Application?

Identify all features of your application and consider the 80/20 rule, which is a very

blanketed rule but applies in nearly all aspects of business. The rule states that 80% of your revenue will come from 20% of your customers.

So when evaluating which features are highly sought after, don’t forget about the few 20%, and also make sure that you are releasing products that keep the key customers happy and coming back.

With this approach, you can also create products based on aspects of your software such as those that customers perceive to be of higher value than others?

Other questions to answer are, do all features have the same perceived value, and are multiple instances of your application being run simultaneously?

Keys To Remember When Evaluating and Deciding Which Licensing Type To Implement

Here are some thoughts to consider when trying to decide which Licensing type you want to go with:

  • Time-Based Licensing: If your customers require use of your application only a few times a month/year, then time-based licensing might be your choice because although they are not using it frequently, you are still receiving revenue from them through the duration of their lease.
  • Break It Up: Are you offering a product where select customers are finding value through different features or modules? If so, you can break that all-inclusive product into three or four separate products. This increases your market share and product affordability, all while giving your customers the best bang for their buck.
  • Usage-Based Licensing Solution: Are your end-users implementing multiple instances of your application, i.e., is your application installed on a server and being accessed by all who have access to the server? In this situation, a usage-based licensing solution would ensure that you are seeing revenue at each use or instance of the application.

Choose the Best Licensing Strategy for Increased Revenue

Simply put, through licensing your application, you will see increased revenue through additional revenue streams as well as have the ability to penetrate new markets and develop innovative solutions or product features.

Sadly, most software developers don’t see the true value that a software licensing strategy has, but per the information above, it is more than creating multiple revenue streams.

Implementing a software licensing strategy is about increasing the longevity of your company and best leveraging information gained about your current and future customers, which in turn enable you to consistently and reliably produce applications that are in demand and generate revenue for years to come as your competitors come and go.

About the author

Conner Zinanti

Conner graduated from Metropolitan State University of Denver and currently working as the Sales Specialist for KEYLOK out of Lakewood Colorado. Providing unique hardware-based licensing and security strategies to small mom and pop shops all the way up to fortune 500 companies.