Software Monetization: Trends in Business and Monetization Models

As director of global marketing and enablement at Flexera, Nicole Segerer keeps her finger on software monetization trends. Here, she shares insight about how software suppliers are using deployment and monetization models, the relationships between these models, best practices for pricing and licensing, and guidance for product managers.

• What are the distinctions between deployment and monetization models?

A deployment model defines where software is running. SaaS solutions, for example, are usually hosted in the cloud and managed by the software supplier. The other prevalent deployment model is on-premises deployment, where the software is hosted and managed by the end customer. This was the main model for a long time and is still widely used; for applications with high security or performance requirements, on-premises deployments are still the preferred model. With more software deployed on devices, embedded software is beginning to play a stronger role.

The monetization model defines how software suppliers license and price their software. The most common models on the market are:

– Subscriptions, where end customers pay for the time they use the software (often through 1- or 3-year subscriptions); all maintenance and updates provided in this time are included.

– Perpetual licenses, in which the end customer purchases the right to use the software permanently. Usually a maintenance contract, which guarantees updates and access to new versions, is added at 15–20% of the license value per year. If the maintenance contract ends, the customer has the right to use the software, but is no longer entitled to maintenance and updates.

– More flexible models, based on usage or outcome, are also seeing more adoption. Here, customers pay for what they actually use, which requires the ability to track the agreed upon usage metric.

The monetization model is technically independent from the deployment model. For example, subscription is often used for SaaS solutions, but there are also many vendors that offer subscriptions for on-premises deployments.

• What are the top deployment models today?

Flexera just released a report based on a survey of how technology companies take their products to market. The August 2019 Flexera Monetization Monitor: Monetization Models and Pricing reportevaluates trends in both deployment and monetization models. We’re seeing that most software suppliers have to manage a mix of multiple deployment models. This is driven by their varied products and by different customer requirements.

Looking at the distribution of these models, on-premises deployments have the broadest adoption, with 63% of respondents using on-premises moderately or extensively. Embedded software deployments are used moderately to extensively by 54% of respondents; 52% have moderate to extensive SaaS deployments.

• Are SaaS deployment models easier to monetize?

By definition, SaaS deployments are always connected. These deployments make it is easier for software suppliers to track usage and to manage use rights; they also give customers full transparency about their usage behavior. That also makes them easier to monetize. However, with our research showing that companies must manage more than one deployment model, even companies that primarily use SaaS often still have to manage the bigger complexity that comes with managing multiple models.

• What are the top monetization models today?

Subscription has become the most widely used monetization model. The Flexera Monetization Monitor shows that 74% of respondents use subscription for some or all of their products. Perpetual licenses are still widely used, with 65% utilizing perpetual licenses for some or all of their products; 59% of suppliers are leveraging usage-based models; and 47% use outcome/value-based models.

While subscription is taking the lead, software suppliers must take action to get the systems and processes in place to implement multiple monetization models. The research shows that few suppliers leverage only one model across their offerings.

• How will things look different in the future?

There isn’t a single solution for how software is sold and delivered, even within a given company. Software suppliers will continue to support multiple models to support the needs of various markets.

As to deployment and models, more companies will move to SaaS, which is the continuation of a trend that started many years ago. Likewise, the trend to more flexible monetization models (like subscriptions or usage-based models) will continue.

When asked what software suppliers are planning to do in the future regarding their pricing and licensing policies, a couple of clear trends become visible. Suppliers will be:

– Making it easier for customers try before they buy. This is the top priority of those planning to adopt new licensing policies in the next 12–18 months, with 41% saying they plan on lowering entry barriers with trials. Time-limited or feature-limited trials have long been enablers to jump start the software sales process. The study reinforces their ongoing usefulness.

– Changing licensing options. The report shows companies shifting between licensing options as their monetization models mature. Groups of companies plan to move to user-based licensing, to device-based licensing, or to concurrent models. Adding new meters is also a priority for many.

– Tightening license controls. Software suppliers cite adding better automated enforcement and more customer audits as planned changes.

• What’s the most important thing for product managers to be aware of?

Monetization, pricing, and licensing are critical strategic topics that define the success or failure of a product line. In order to deliver a short time to value for customers and to build reliable recurring revenue streams, product managers must have appropriate processes and systems in place to manage and monetize their products effectively.

Also, product executives should review all their product lines to streamline monetization and deployment options. Many suppliers create unnecessary overhead by managing different monetization models for different products. The result: a multitude of licensing tools and pricing models that become hard to manage.

Finally, to lead their products to success, product managers should review their licensing, pricing, and monetization strategies for ease of use and acceptance by customers. This is possible by focusing on:

– Easy access to their solutions, through try-to-buy processes that introduce potential customers to the software;

– Monetization models that get customer acceptance while delivering recurring revenue streams; and

– Understanding usage as a basis for building better product and moving to more flexible monetization models, based on real usage or outcome.

About the Author

Nicole Segerer is the director of global marketing and enablement for Flexera’s software supplier solutions. She and team own go-to-market strategy, positioning, and messaging for Flexera’s Software Monetization and Software Composition Analysis solutions and work closely with Product Management. Nicole is responsible for presenting software suppliers with new solutions that help them digitize their business models and software options. Key topics in her work are software monetization for software, SaaS, and IoT businesses, as well as securing and managing open source software. Nicole has worked in the software industry for over 10 years, specializing in software monetization, software asset management, and digital business needs.