SaaS should make software cheaper

A brief history of cloud software licensing

Johannesburg, 08 Dec 2020
Cor Winkler Prins, CEO and co-founder of 4me.
Cor Winkler Prins, CEO and co-founder of 4me.

Anyone working in IT will have noticed the limitless creativity of vendors when it comes to licence types and structures. Per user, per employee, per CPU, per GB, and so on. Most of these have their roots in traditional on-premises IT. And then came the cloud...

Salesforce can probably be credited with kickstarting the cloud-software market with its “no software” claim from the year 2000. Much has changed since then and increasingly more enterprises are looking to support their business needs with services provided from the cloud.

Licence models did not change

Most vendors failed to change their licensing model as they ported their software to the cloud. If the service in the cloud is better for the customer, why not a similarly appropriate licensing model? What I mean by that:

You selected a new application and the sales rep of the vendor asks you how many licences you are going to need. Your organisation employs 5 000 people, so you go and buy the amount required to cover that need, upfront, for a year, but more likely for three years.

Lack of scalability

The issue is that the model in no way matches your actual requirements. What you really require and should expect is the flexibility to scale up and down as your organisational needs change. But before we get ahead of ourselves, let us take a look at what the reality is for many customers today:

Any number of factors will impact the usage of a system in the course of a year. Whether extended holidays, sick leave, employees joining or leaving the organisation, mergers and divestitures, or furloughs due to a global pandemic, all of these will impact usage. It may look something like this:

Vendors will now say: “Well, I see the maximum number of users might be 5 000 within a given month!” so you will have to buy 5 000 licences. This type of contract is visualised by the black line in the graphic below:

Why would you license a SaaS solution in the way mainframe licences have been charged for decades, paying for the peaks and not the actual usage? For most of the year, you are grossly over-licensed. This is great for the software vendor, though less advantageous for you as the customer. The next graph illustrates how shocking this fact can be.

In your effort to save some money, you might consider lowering the number of licences you order. Unfortunately, you then face the reality of users being locked out during the peaks, penalties for over-usage or creating workarounds to avoid exceeding the number of licensed users. None of these options are appealing.

Were you to investigate the loss being over-licensed costs your organisation, it might easily be 10%-30% of what you paid for the licences. Multiply this across the many tools and products being used by your teams and you see how quickly this drains your budget.

Concurrent licences could help

Vendors, of course, are well aware of this issue, hence many offer concurrent/floating user models. While this does solve a few issues, it does not solve over-licensing because you are still required to order for peak consumption.

And it gets worse

Many brilliant licence models call for licences to be ordered before a project may begin. In addition, these licences are often tied to a set period of time. Should your project run into delays, the loss in value for unused licences hits your bottom line even more aggressively. With only a handful of licences being used during the implementation or deployment, you will be bleeding cash without realising any value until your organisation is maximising licence usage.

This is simply too much red. The likes of AWS and Microsoft Azure have made it possible for software vendors to scale their infrastructure up and down depending on actual use. It is time for software vendors to pass some of this flexibility on to their customers.

The right way

SaaS providers wanting to offer a more flexible licensing model should reconsider the pricing of their products. Innovative cloud companies will often give the customer the following options:

  • Pay-as-you-go: Only pay your actual usage at the end of every billing period. Usually, this also means a slightly higher license cost, due to the increased effort involved in sending and collecting monthly payments. But it gives customers the freedom to scale up and down as they see fit and they are not committed to a long-term contract.
  • Prepaid service credits: To enjoy more advantageous pricing, organisations can purchase in quantity and use the licences over time as their business requires and with no fear of licence expiration or price increases. Your business needs dictate how many licences from your prepaid pool of service credits are consumed over time.

Your new reality could look like this:

Looks much better, does it not?

The topic of licensing is important to me not only as the CEO of 4me looking for more ways to outsmart our competitors; it is important to me as a buyer of SaaS as well. All application services we use internally are obtained as a service, and I wished our SaaS providers would offer pricing models similar to what we offer our customers.

Who am I?

My name is Cor Winkler Prins. I am the CEO and co-founder of 4me. I have worked in the service management space for more than 20 years. At 4me, we believe it is our role to take enterprise service management to a higher level. To do this, we constantly look for ways to remove complexity, which allows our customers to free up resources needed to improve their service management maturity.