What Is Perpetual Licensing vs. Subscription?

A common question these days concerns the difference between perpetual licensing and subscription when purchasing software. The latter approach, known as Software as a Service or Software as a Subscription (SaaS), has become increasingly popular in recent years. This article will define the two methods of acquiring software and explain why SaaS is becoming the most popular perpetual licensing approach to acquire software.

Contact Cisco

  • Get a call from Sales
  • Call Sales:
  • 1-800-553-6387
  • US/CAN | 5am-5pm PT
  • Product / Technical Support
  • Training & Certification

What Is Perpetual Licensing?

Before the development of the SaaS model, the perpetual licensing approach was the default method for purchasing software. In this method, a customer buys a license to a solution giving them the right to use the software in perpetuity. While this might seem like a simple approach to selling software, in practice it is typically much more complicated.

To keep up with changing technology, business conditions, and to generate revenue, software developers usually update their solutions on a regular basis, often annually but sometimes more frequently. Thus, purchasers of perpetual licenses find themselves needing to pay for these updates if they want to access the latest functionality. Additionally, users typically must stay current with updates if they want to access the software vendor’s technical support. In many cases, there are also expenses associated with installing and maintaining perpetually licensed software.

What is SaaS (Software as a Subscription)?

Software as a subscription allows users to purchase the right to use a solution as long as they pay the recurring subscription fee (usually billed monthly or annually). Included with their payment are any bug fixes and software updates made by the vendor. Additionally, because SaaS solutions are typically hosted in the cloud, substantially reducing or eliminating altogether customer costs associated with installing, updating, and maintaining the software. Many SaaS offerings include a downloadable version, enabling 24/7 access to the software in the case of an internet outage., customers don’t need to download, install, and maintain the software to use it, saving the expenses typically associated with such activities. SaaS solutions generally involve more frequent updates than perpetually licensed software as providers try to reduce churn by keeping up with customer expectations.

What Are Some Advantages of SaaS Software?

Reduced cost to acquire

Because SaaS solutions are purchased for a limited period of time on a recurring basis, they can typically be acquired for much less than a perpetually licensed solution. This benefits buyers by making it possible for them to afford software that would be out of their price range otherwise. At the same time, the lower cost of acquisition provides software vendors with the opportunity to sign up more customers.  

Automatic Updates

While the upfront cost of buying a perpetual license is typically higher, sometimes much higher, than buying a SaaS solution, you might think that in the long the run this method would be less expensive than a subscription-based approach. However, this is not necessarily truein actuality, as purchasers of perpetual licenses are likely to need to pay for upgraded versions of the software after buying it, which addings to itsthe total cost.

Licensed software may allow the buyer to use the solution in perpetuity, but it does not cover subsequent updates. Updates vary in price, but a cost of 25% or so of the original purchase price per update is common. This means that within a few years of a purchase buyers may have to pay double the initial price of acquiring a perpetually licensed solution to continue to access all the latest features.

By providing automatic updates to all subscribers, SaaS software saves users the expense of purchasing an update and having to install it on their servers.  

Reduced infrastructure and service expenses:

There are a number of costs associated with hosting software yourself, including server space, installation costs, bug fixing, and costs associated with software updates. Installing updates can involve troubleshooting efforts, which can take up staff time or require hiring outside help. As a result, perpetual licensing can turn out to be the more expensive approach.

SaaS subscribers are not required to pay to host the software, instead accessing it via a cloud version provided by the software provider. This saves what can be significant expenses associated not only with buying or leasing servers but also with maintaining them.

Security issues

Because the software provider only needs to manage a single version of their software in the cloud for many subscribers, they can pool the fees they receive to optimize security. Additionally, security updates are automatically available to users. This addresses a major security issue with perpetually licensed software where a failure to pay for and install updated versions of such solutions leaves users of older versions vulnerable to security breaches via unpatched vulnerabilities.

Appeal to a wider audience

Software providers benefit from a lower cost of acquisition by broadening the customer base for their solutions. If they can keep these customers as subscribers over time, this enables them to, ultimately, realize greater revenue. An advantage of subscription pricing is the ability it offers developers to incrementally improve their solutions over time, rather than trying to stuff as much new functionality as possible into a yearly update. By paying monthly or yearly, customers are funding ongoing product innovation, in addition to the customer support they can access.

Pricing flexibility

SaaS solutions also offer additional pricing flexibility, whether via tiered prices for different levels of access, or a freemium model, where basic access is free while access to greater levels of functionality can be purchased via recurring payments. Usage-based pricing is another popular pricing approach. It enables users to work with software that might be too expensive on a flat monthly fee basis. As their usage of the product rises, so too will the fees they pay.

The future of subscription pricing

While SaaS solutions are increasing in popularity, there are still some programs sold using the perpetual licensing model. However, the popularity and advantages of the SaaS model make it likely that, with the exception of one-off products like video games, most sectors of the industry will ultimately move to subscription pricing.

For instance, leading popular business products like Cisco’s Platform Suite, which features a variety of popular business apps including Webex and Securex, Adobe Photoshop and its suite of associated apps and Microsoft’s Office suite including the Word processor app have moved to the SaaS model, enabling them to increase their customer base by lowering the cost of acquisition.

The subscription pricing model generally encourages active customer feedback in the further development of the software. This helps strengthen customer loyalty because they are consistently seeing improvements to the software as opposed to waiting for once-a-year updates as is often the case with the perpetual licensing model.

The lower upfront costs in the SaaS model make it easier to entice customers to give your solution a try. If you are attentive to their needs going forward you can turn those curious about your software into long-term customers, optimizing profitability by boosting your average customer lifecycle value. The more frequent changes associated with SaaS products also help vendors stay competitive and grow by demonstrating to customers their ability to rapidly respond to changing market conditions and customer preferences.

One risk of the subscription model is customer churn – if your customers don’t feel they are not receiving the best value for their money, the customers are more likely to not renew their subscription when it comes to an end. For this reason, SaaS companies must be closely attuned to customer expectations in order to stay competitive and grow their business.

It's also important to pay attention to competitor pricing. If your sector of the industry features primarily one type of pricing, it may be difficult to attract attention if you use a completely different model. However, even when using the same pricing model as your peers, you should make sure that the prices you charge reflect your company’s internal pricing dynamics, rather than simply copying your competitors. Pricing your product based on the value it offers is the best way to position your company for long-term growth.