Software Subscription – A Promising Model
March 17, 2022 | Reading time: Approx. 5 Minuten
Product Manager at FIS
Subscription models have been available for a very long time. What started in bookshops and classical music of the 17th century, has become an integral part of everyday life. These models are standard IT practice. Read this article to find out the advantages and disadvantages of software subscription.
Typical subscription models such as cell phone contracts and newspapers are well-established in almost all areas of life.
Well-known examples include Netflix and Spotify in the entertainment industry, car leasing or car sharing in the mobility industry and, nowadays, such services are even available for the food industry.
Subscription models for software products are also rapidly advancing.
What is a subscription model?
As far as a software solution is concerned, the customer pays a regular fee and has the right of use over a fixed period of time. The software provider is responsible for software maintenance, services and currentness. In case of a license purchase, the software solution is transferred to the customer. This means that the customer will be responsible for operation, updates to new versions and the implementation of further developments.
The advantages of software subscription
The decision between software subscription and license purchase is based on many factors. A subscription model offers many advantages, such as:
Lower start-up costs
Purchasing a software license requires high initial efforts as well as costs for release upgrades to a new version. In case of a subscription, license costs and maintenance are spread over the contract term. An important hurdle in the acquisition of software is eliminated as the preliminary costs for a subscription are usually lower than those for a standard permanent license. This opens up new opportunities even for smaller and medium-sized companies.
Planning security of software costs
Subscription models offer linear efforts and, consequently, facilitate budget planning.
Moreover, there will be no major follow-up investments during the contract term as maintenance and release upgrade are included. An exception is the significant change of the settlement unit. In this case, the subscription fee will be adjusted.
Operating costs versus investment costs
Software solutions are preferably subscribed by companies focusing on their operational expenditures. Software licenses based on subscriptions can be specified as “operational expenditures” (“OpEx” in short), while perpetual licenses need to be settled as “capital expenditures” (“CapEx”) in short.
This leads to a differentiated tax structuring. Operational expenditures are claimed in the corresponding accounting period in which they are incurred. As costs, they fully reduce the profits in this period. Capital expenditures can be claimed in the form of depreciations in the respective period.
Flexibility
It is not necessary to invest large sums without knowing how a company will develop within the next few years. The license unit (user, master data records, number of documents) can be scaled freely.
It is also possible to terminate the subscription after the end of its term. This reduces the risk of a long-term software binding due to high license investments.
Currentness
If the software user is not interested in maintaining the solution, a software subscription is very convenient. The contract term includes a technical upgrade. The software vendor is responsible for the corresponding resource expenditures.
Here, customers benefit from the right to the latest version of the vendor software including further developments and optimizations. This is a major advantage in the fast-moving IT world in particular.
Support by the manufacturer
Customer satisfaction with regard to subscription models plays a crucial role for software manufacturers. It is decisive for the renewal of a subscription and, eventually, for sales growth. Therefore, subscriptions help strengthen the vendor relationships.
Direct access
Consumers benefit from direct access to the services. For a software subscription, this means that server functions are used instead of programs purchased.
The disadvantages of software subscription
Sovereignty of license not with the customer
The customer has the right to use the software solution during the term of the contract. However, it does not become the customer’s property. A subscription requires software currentness and maintenance activities as well as release upgrades need to be made in specific intervals.
Standard software more attractive than individual adjustments
The subscription model is most attractive if the solution is close to the standard software version. A release upgrade does not include customer-specific adjustments.
Higher total cost of ownership
If the software implementation is successful and a long-term solution, the costs for software subscriptions are higher in the long term compared to perpetual licenses.
Conclusion
Subscription models offer many advantages and are becoming more and more popular. The cost and tax structures are different, which also enables smaller and medium-sized companies access to otherwise costly software solutions.
Moreover, software solutions in the subscription model are up-to-date due to included maintenance and release upgrade. With today’s fast-developing IT world in particular, this can be a competitive advantage. Every customer must decide for themselves in favor of subscription or purchase on the basis of their framework conditions and preferences.
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