This whitepaper discusses how software companies can introduce subscription licensing models to generate recurring revenue streams. Some key points: - Perpetual licenses are still dominant but subscription models are growing as cloud/SaaS grows. Subscription licenses provide recurring revenue over time rather than an upfront lump sum. - Subscription models offer benefits like predictable recurring revenue, flexibility to meet different customer needs, and lower upfront costs that can open new markets. However, they require changes to business processes like pricing, product numbering, renewals, and revenue recognition. - When implementing a subscription model, companies should add it without replacing perpetual licenses. They also need to align compensation, pricing structures, and operations to support the subscription business

1. WHITEPAPER
Rethink Your Software Monetization Strategy:
Subscription Licensing Models Enable
Recurring Revenue and Customer
Experience Advantages

2. Rethink Your Software Monetization Strategy
2
As cloud applications, based upon SaaS delivery models,
continue to show significant growth, many application
producers are taking a step back and asking: How can we
achieve the desired business outcome of driving predictable
recurring revenue streams given our mix of legacy and new
cloud-based solution offerings?
And an even bigger question: Is there a flexible software
monetization model which can help us derive maximum
business value from existing solutions and customers—while
setting the stage for the next round of solution offerings?
Perpetual licenses, the traditional software monetization
model, continue to be a dominant model and have served
the industry well. However, with the growth of SaaS and
cloud, many producers are adding subscription licensing
models into their existing go-to-market strategy to create
predictable and recurring revenue streams.
In fact, many industry analyst reports, as well as software
licensing and pricing surveys, show that perpetual licensing
revenue is on the decline and subscription licensing
revenues are on the rise and will continue to increase as
technology shifts to SaaS and the cloud. In some cases,
entire software vertical markets such as Electronic Design
Automation (EDA) standardized on the subscription license
model in the early 2000s, after several years of limited
releases to the low and high end of their markets.
This white paper will offer insight on how application
producers can introduce a subscription model into their
software monetization strategy to maximize revenue
generation and offer customers a compelling experience.
Topics include:
• Definition and comparison of software
monetization models
• The business case (and a myth)
• Pros and cons
• Operational considerations
Rethink Your Software Monetization Strategy:
Subscription Licensing Models Enable
Recurring Revenue and Customer
Experience Advantages
Myth Debunked
Do subscription licensing models cause revenue dips?
No, a subscription license model is typically added to
a portfolio of models to address new market needs,
and doesn’t replace the perpetual revenue stream.
Three important preparations:
• Add, don’t flip to subscription license models
• Align compensation with the desired outcome
• Culturally prepare for a new revenue
recognition process

3. Rethink Your Software Monetization Strategy
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Definition and Comparison of Software
Monetization Models
Monetization models for software applications typically
include the following, each one designed to meet a different
customer need:
• Perpetual: most common, pay once and unlimited
use, revenue hits PL when the order is booked.
Maintenance, which typically includes technical support
and the right to software updates, is usually priced
as a separate item. This is the classic license model
behind most software. This model was largely based
upon a paradigm of thinking of the software license
as a physical good that is purchased once and used
forever. But, if you conceptually think of software as a
service (not to be confused with SaaS), you can become
more creative in matching your “service” to the way it
is purchased and consumed. As a result, some of the
models below are becoming more popular.
• Subscription: fast growing, highly flexible, and where
revenue is recognized based on a regular schedule
(monthly, quarterly or annually) to reflect the delivery
of value over time (e.g. the stream of maintenance
updates). The subscription license is usually based on
an annual or bi-annual term such as 1, 2 or 3 years,
and includes the right-to-use the software and support.
If a subscription license is not renewed at the end of
the term, then the customer loses the right to use the
software and maintenance rights.
• Rental (or Term): This is similar in concept to a
subscription license in that the right to use is
temporary. With these licenses, maintenance may
or may not be included. These are typically designed
for peak usage needs, such as a 1 month license. This
allows for the delivery of a license to meet a short-term
need (e.g. tax software during tax season), without
discounting a subscription or perpetual license to
meet the customer need.
• Utility (pay-for-use, pay-for-burst, pay-for-overage):
fees are based upon actual usage (i.e. water or utilities
for a home, cell phone) and revenue is recognized
periodically as consumed and paid. While this tends
to be the least used of all of the models, it is gaining
momentum in cloud and SaaS based applications. In
fact, IDC predicts:
“Usage-based software pricing models will be an option
for 80% of applications by 2017.”
While perpetual license models are still most common, many
application producers have a hybrid mix of subscription,
rental, usage and traditional license models to meet different
market needs.
Subscription Licensing Model Business Case
Subscription software license models bring several benefits
to software producers and intelligent device manufacturers,
including revenue growth, predictable and recurring revenue
streams, flexibility to meet customer needs and easier
adaptability to pursue new markets or market segments
where the large up-front cost of a perpetual license may not
resonate with customers.
Greater Monetization Opportunity
At first glance, it might appear that a perpetual model
offers a higher revenue stream because of more immediate
revenue recognition. However, the long-term reality is
different. After 3 to 5 years, the models hit a crossover point
where subscription revenue exceeds perpetual results. It can
be compared to the amortization of physical goods like
computers. The pricing of a subscription license model is
described in greater detail later in this white paper.
Increased Flexibility to Meet Customer Needs and
Pursue New Markets
While revenue certainly plays a big role in a decision to
add a subscription model, customer and market needs
play an equally important role. Because of their flexibility,
subscription models can be adapted to different customer
and market needs. Examples include:
• More flexible pay-over-time approach can appeal to
large accounts with a big appetite for software but a
limited budget for perpetual licenses. Large accounts
may need a wide amount and variety of software to get
their job done. The subscription license model allows
a wide and deeper penetration of your software for
a given annual budget. This may allow you to fortress
your customers against “point tool” providers because
your software is easier to buy.
Figure 1: License Model Definitions
Model
Perpetual
Subscription
Rental
(Term)
Utility
(Pay-per-use)
Time
Limit
No
1, 2, 3 year
1 mo. - 3 yr
Yes
Maintenance
Included in
the License
No
(Separate Item)
Yes
No
Yes
Revenue
Recognition
Up Front
Periodic
Up Front
Periodic
Payment
At Delivery
Periodic
At Delivery
Periodic
Arrears
$250
$200
$150
$100
$50
Purchase Year 1 Year 2 Year 3 Year 4 Year 5
• Perpetual: $100 list price; $20 annual maintenance
• Subscription: $40 annual fees
Perpetual License
Revenue Stream
Subscription License
Revenue Stream
Subscription license
priced to achieve 3-5
year “cross over”
Figure 2: Subscription License Model Pricing

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• Lower cost of entry opens up opportunity with budget-
sensitive or smaller accounts. Smaller customers (who
may eventually grow into large customers) may find the
cash-flow of a subscription model more affordable to
their finances.
• Subscriptions can be a preferred model for businesses
driven by operating expenses, which is a popular
option where the use of software may be expensed
for the duration of a project, common with
technical software.
• Increased customer loyalty by offering license
models more suited to the way that customers by
and use software.
Subscription models can be adapted for variable use
patterns (engineering design automation firms that run
experiments and testing at different phases throughout the
project) and project-based spend. For solutions that change
less (ERP or storage management) perpetual licenses still
represent a good option.
Summary of the Pros and Cons of the Subscription
Licensing Model
The revenue potential and new customer opportunities
make subscription monetization models highly attractive.
As a company considers adding the model, it’s important
to weigh all the variables involved in offering a
subscription model.
By thinking through these variables, application producers
can execute a plan that optimizes the benefits and
minimizes challenges.
Operational Considerations
Adding a subscription model to your operations requires
changing business processes. The following areas need to
be assessed:
How will you handle pricing?
To set up a structure that will support different scenarios, key
pricing issues and considerations should be reviewed.
• If you already have a perpetual license model, the
pricing for a subscription license should be such that
there is a cut-over point in the 3-5 year timeframe.
Before that cutover, the total fees for the perpetual
license and maintenance are greater than the fees
for the subscription license for the same period. If we
refer back to Table 2, we can see that for a 4 year
cutover, the price of a subscription license is about
40% the price of the associated perpetual license
for the product.
• Will there be consistent pricing across perpetual and
subscription licenses across all products? For example,
should the subscription version of a product be sold as
a fixed percentage of the perpetual license (assuming
one is already in the portfolio), or should there be
adjustments based upon product usage patterns or
other factors such as market position.
• How will mid-term upgrades be handled? For example,
in the table below if a customer has the Basic CAD
package and is 6 months into an annual term, are your
systems and processes capable of pricing the Upgrade
Basic to Advanced product at $60K, to reflect the
remaining portion of the license? And if so, will your
reporting systems know the difference between
a mid-term upgrade versus an upgrade that was
simply discounted for some other reason
(competitive pressure).
High
Medium
Low
Small Typical Large
Revenue
Deal Size
Budget-sensitive
Customers
+Subscription
Operating Expense
Appeal
Large
Account Flexibility
Perpetual
Figure 3: Subscription License Model Business Opportunities
Enterprise Customers
Pros Cons
Lower cost of entry Higher total cost of
ownership (TCO)
Wider solution access for a
given spend
Possible spend uncertainty
for future needs
Applied to operational
expense budget
Sales focused on engaged
relationship vs. a new sale
Remix or adjust based on
usage needs
Application Producers
Pros Cons
Predictable recurring revenue
stream over time
Business process changes,
including ammendments or
changes to the subscription
agreement over its lifecycle
Retain/gain customers since
easier to do business
Revenue deferral through
recognition change
Wider market appeal,
more options
Initial revenue certainty during
the initial change, customers
selections will be unlcear
Less need to discount because
offering can match
customer needs

5. Rethink Your Software Monetization Strategy
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• At some point, you will have to market-test your pricing
assumptions and refine them to meet customer needs.
A nice attribute of a subscription license is that you can
periodically adjust the price to meet market conditions.
What will the impact be on product numbering?
It’s important to establish a part number structure to allow for
your software with subscription licenses to be differentiated
from those offered with a perpetual license for purposes
of ordering, renewal and operational business processes.
There are two different approaches that are typically used,
depending upon the design of your Configure, Price and
Quote (CPQ) systems and processes.
These two typical approaches include:
1. The perpetual and subscription license model should be
identified by a unique product code. This means if you
were to add a subscription license model for all of your
existing products, your product codes would double,
leading potentially to “SKU proliferation”. Below is an
example of this approach. This tends to be the most
popular approach used by companies
• Perpetual code: A123456P
• Subscription code: A123456S
2. Use the same part numbers for identifying both license
models, but add an “order time attribute” to the
product code when ordering the product to identify a
duration or begin and end-date of the subscription.
This approach reduces SKU proliferation, but requires
the use of a flexible configurator at the time of
ordering and tracking of the part through the various
systems requires retaining the order time attributes to
distinguish between the two products for operational
purposes (revenue recognition, sales tracking, etc.)
• Perpetual code: A123-456
• Subscription code: A123-456 15April2015
14April2016
Other variants may exist based upon your systems and
processes. Whatever the approach, plan ahead to
determine what works best for your business systems and
processes and determine if you need to make changes.
When should the subscription period begin and end?
This seemingly simple question has important implications
to revenue/billing systems and the customer experience. If
the subscription period begins when an order is processed
in the software producers system, then a predictable billing
cycle can begin. But, the customer may feel short-changed
if they don’t activate their software for a few weeks. If the
subscription period begins when the customer activates or
downloads the software, then they get the benefit of the
subscription for the entire period but the software producer
has to have “internal system triggers” to know when the
software has been activated or downloaded. In general, for
direct sales, the period usually begins when the order for
subscription software is processed. For subscription software
sold and renewed through a channel, the subscription
period usually begins at activation.
What is involved in the renewal process?
Establishing a reliable and accurate renewal process is
critical to protecting and growing the recurring revenue
stream. The renewal process can be complex and begins
with identifying which customer licenses are about to expire
and sending them notification in advance of a renewal.
However, if a customer is using a lot of licenses, perhaps
across multiple organizations or groups, you may want
to look at their entire configuration and see if they prefer
grouping renewals by location or internal organizations and
re-aligning or “co-terming” different groups of licenses (see
the next question for more considerations for a subscription
co-term or co-termination).
The renewal process can be a little more involved if there
is a renewal event for a customer who purchased the
subscription license from a channel partner. In this case,
should the software producer initiate the renewal directly
with the end-customer or should the channel partner
initiate the renewal process? When a channel is used for
selling subscription licenses, it’s typically advantageous for
everyone if the software producer knows who the end-user is
and initiates the subscription process, but uses the channel
partner to present the renewal.
Renewals can be structured as:
• Event-driven—sent based on expiration date on one
or more licenses
• Evergreen—an automatic renewal with an option
to opt-out
There is also a very important consideration for this to
work – accurate contact and renewal information must be
captured and tracked. A detailed system of record may need
to be in place that goes beyond what a typical CRM tracks.
For example, a customer might want to renew licenses based
upon various hardware where the software is used. This
information might only be available from license activation
and download systems.
Product Annual Price
Basic CAD $100,000
Advanced CAD $200,000
Upgrade Basic to Advanced $120,000

6. Rethink Your Software Monetization Strategy
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How will co-termination work (alignment of all expiration
and renewal dates for customer convenience)?
It’s best to get ahead of this well-known challenge and
define a specific approach for a new subscription licensing
model. Customer convenience needs to be balanced with a
fair and equitable solution that avoids manual processes.
Example:
• Customer buys a license on January 1, 2015 that
expires January 1, 2016
• Customer buys another license on June 1, 2015 that
will expire June 1, 2016
• Customer requests a single renewal event per year
Options:
• Price partial year maintenance for the second license
when it is purchased (revenue decrease in current year)
• Charge a full year for the second year license and
adjust all expiration to a common date
(operational overhead)
• Or perhaps there are other options that follow
company policy
After you define the policy it should be documented like all
other policies and consistently used with customers.
How will revenue recognition change?
A purchase of a perpetual license is accounted for as
immediate revenue and bookings/revenue are done at the
same time.
With a subscription license, that changes. Revenue is
recognized ratably over the term of the license by the
financial billing system. Bookings are immediate and a
revenue backlog builds over time.
Your ERP and finance systems may need to be adjusted in
two key ways:
• The billing process may need adjustment to bill the
customer at various intervals
• Systems need to properly accrue revenue for the
new model
By planning for these changes in advance, revenue
reports will remain accurate and it will help prepare
key stakeholders for how revenue will change under a
subscription model.
What product changes need to be made?
Software products often use license keys that define license
rights – what can be accessed for use and how long that
use is available.
Products under a subscription licensing model need to
recognize that the “right to use” in a license key may expire,
which the product must identify in the license file and
act accordingly if the end-user is trying to use the license
beyond the expiration date.
The product behavior that you want to occur needs to be
designed for the subscription licensing model. The licensing
code needs to know what to do if the rights identified by the
license key has reached expiration, which can include:
• Stop operating
• Operate with limited functions
• Continue to operate but with messages
How the product behaves should be carefully considered.
The customer must be made aware of an out-of-compliance
situation, but you want to avoid disrupting the customer
trying to perform work. This behavior should be defined by
appropriate cross-functional team members, and codified in
a standard way across all software in the portfolio.
Do changes need to be made to license key generation?
License keys with a begin date and expiration date, or a
begin date and duration need to be generated. By using
licensing technology, the license keys can be generated to
adjust the subscription term to begin at the expiration of the
previous license based upon the SKU or SKU + entitlement
attribute. Another advantage of subscription licenses is that
there is no need to create a “version” in the license key
since clients are entitled to all updates.
What key areas of the legal agreement should be reviewed?
Legal agreements may need to be updated to recognize
expiration events and the customer obligation should this
occur. The agreement should clearly state that a customer
has a limited right to use instead of a perpetual right to use
the software.
Does sales compensation need to be adjusted?
Under a perpetual license model, sales compensation
works through bookings, which usually aligns with revenue
recognition. However, in a subscription license model,
compensation is realized up front but revenue is realized
over time. Timing of sales compensation will change since
renewals occur over time.
Because of this change, sales may be more attracted to
perpetual licenses and encourage clients to select that
option. So that the best option for the customer is presented,
sales incentives need to be reviewed and updated to incent
sales to present options in this way. It may mean a higher
sales cost up front (percentage of revenue).
In addition, some companies design their sales systems and
processes to compensate sales on the initial bookings, and
then use an internal renewals team to manage the renewals.

7. Rethink Your Software Monetization Strategy
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What is the best approach to roll out to customers?
For many companies, the most advantageous approach
has been to position a subscription as a purchase choice
of “lease or buy.” A more successful rollout will occur by
finding customer opportunities where the value proposition
naturally resonates. There’s no need to force a change and
require a full-scale migration to a subscription model. In
fact, this flexibility can be used as a competitive advantage.
Preparation of customer-facing departments also plays an
important role in the customer rollout. “Inside-out” training
of sales, customer service, technical support and other
key areas will ensure that your customers understand the
benefits, options and the impact.
It’s also important to proactively address a concern/myth
that may emerge: offering a new model will cause customer
shifts to the competition. It’s rare and here’s why. Customers
invest deeply in enterprise solutions and often times
integrate with other systems and establish key business
processes and training. A subscription licensing model is
normally considered a minor change in the overall scope of
things and not worth switching to the competition.
Over time and with increased acceptance, migrating
exclusively to the subscription model can be considered
(but don’t move too fast!).
By building a solid plan addressing these questions and
concerns, adding a subscription licensing model to your
software monetization strategy will function smoothly and
effectively in your organization.
Rethink Your Software Monetization Strategy—It’s Time!
If your company is asking “What’s the best software
monetization strategy to drive predictable recurring revenue
streams?” …a subscription licensing model offers
powerful benefits.
• Enterprise customers win with flexible options that meet
their needs
• Application producers win with a long-term revenue
gain and new market opportunities
As SaaS, cloud, and other technologies continue to
explode, the time is now to rethink software monetization
strategies and explore the recurring revenue and customer
advantages afforded by a winning subscription software
licensing model.
How Can Flexera Software Help?
With over 25 years of experience helping software
vendors and intelligent device manufacturers adopt and
implement business and revenue strategies for growing and
transforming their businesses, Flexera Software is uniquely
positioned to help guide and advise you in your adoption
of new software licensing models. Our Global Consulting
Services organization has helped many industries and
hundreds of companies adopt new and innovative software
monetization models (helping the EDA community transition
to “EDA On Tap” usage and subscription models several
years ago). Our experts can help you develop the right
monetization strategy for your business, create best-in-class
business processes and implement enabling technology to
support your software monetization and revenue strategies.
About Flexera Software
Flexera Software helps application producers and
enterprises increase application usage and the value they
derive from their software. Our next-generation software
licensing, compliance and installation solutions are essential
to ensure continuous licensing compliance, optimized
software investments and to future-proof businesses against
the risks and costs of constantly changing technology. Over
80,000 customers turn to Flexera Software as a trusted and
neutral source for the knowledge and expertise we have
gained as the marketplace leader for over 25 years and for
the automation and intelligence designed into our products.
For more information, please go to:
www.flexerasoftware.com

8. Flexera Software LLC
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Copyright © 2015 Flexera Software LLC. All other brand and product names mentioned herein may be the trademarks and registered trademarks of their respective owners.
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