What is a Perpetual Software License?
Monday, December 20th 2021
A perpetual software license charges users, members, or subscribers a one-time fee for the software license to access and use the software. The perpetual license model stands in direct contrast to the subscription model, in which a company charges users, members, or subscribers an ongoing fee to access and use the software.
As widespread as the monthly subscription business model has become the past couple of years, pundits have speculated that the perpetual license business model is on the way out. But here at Keygen, we're not so sure. So let's take a look.
The buyer preference
When faced with the choice of a subscription-based or perpetual license, customers find the more affordable subscription fee appealing; however, in B2C markets they tend to choose the one-time perpetual license fee because it seems like the best deal in the long run — after all, it is a lifetime license!
What buyers often do not see, however, are some of the hidden costs that they can face as perpetual license holders.
The difference between a subscription software license and a perpetual software license
We touched briefly on the most significant difference between the two software licensing models above — the upfront cost of the product — but there is more than an upfront cost to consider when deciding which license model is best for you.
There is the additional cost of software upgrades, the cost for customer support, the cost of software maintenance, and then the costs associated with infrastructure.
Up front cost
The upfront cost for a perpetual license will always be higher than a subscription license because a perpetual license guarantees software access indefinitely. Conversely, a subscription license grants access for a limited time and requires renewal. For software buyers, this may be preferable, depending on your target market. For example, a B2C market may prefer a perpetual model's one-time fee, while B2B may prefer subscriptions so that upgrade costs are included.
For the software vendor, the up-front cost of a perpetual license is a nice lump sum payment; however, subscription-based licenses renew repeatedly, and they have the potential to make much more revenue for a company in the long run.
Software inevitably requires updating, and one of the benefits of a subscription model is that users get access to those upgrades since they are paying for a new software license each time it renews. With a perpetual license, however, subscribers are generally limited to one year of updates, after which they must pay an additional fee to access updates – albeit typically at a discounted rate.
For the software vendor, the cost of upgrades is the same regardless, but for subscription-based customers, the upgrade process is automated. For perpetual license holders, however, updates are on a customer-by-customer basis and, while this can result in increased revenue, it also means plenty of extra work.
Like upgrades, support is an ongoing benefit available to subscription models. Perpetual license models, however, typically limits subscribers to six months to a year of support, after which they must pay an additional fee – again, typically at a discounted rate.
The cost of support is the same for the software vendor regardless, but — as with software upgrades — perpetual license customers must be billed individually once their support contract ends, and that takes additional time and money.
Subscription license holders also get away without paying a monthly fee for maintenance – essentially, this is the cost of upgrading software and keeping support lines available.
Conversely, customers with a perpetual license have to pay an additional fee for any maintenance services after the initial six months to a year from purchase.
Again, for the software vendor, maintenance poses the same problem with perpetual license holders — it requires additional labor and incurs an additional cost.
For software buyers, infrastructure costs are typically not a concern regardless of licensing model. But, of course, this can vary from business to business. Some software may require on-premise infrastructure, managed at the buyer's cost.
But as more and more software is cloud-based (even with perpetual license models), on-prem infrastructure management may be less of a concern for a buyer than in the past. Though, it's worth mentioning because concerns around these hidden costs can arise during contract renewals.
For software vendors, the infrastructure costs and profit margins can vary widely between subscription and perpetual licensing models. Typically, a subscription-based model will be more ready to recoup the infrastructure costs associated with ongoing cloud services, due to the recurring revenue channel.
A perpetual license model on the other hand, if not priced correctly, may end up having smaller profit margins in the long run due to ongoing infrastructure costs when compared to the subscription model.
Infrastructure costs must be factored into the price of a perpetual license offering.
Why are buyers so hesitant to leave perpetual licenses behind?
For a buyer, the concept of a one-time payment upfront for lifetime access to software is appealing because it seems like a less expensive option. But when it is all said and done, the perpetual software license winds up costing software producers and customers more money. This increased cost is likely why perpetual software licenses are getting phased out, even in enterprise sectors.
Is a subscription or perpetual license best?
Whether you are a software vendor or a software buyer, there is no doubt that the subscription model is quickly becoming the more popular licensing option. But that isn't to say perpetual licenses are going away completely.
For some software buyers, subscription fatigue is a growing concern — especially for B2C software markets. Many small-scale software vendors will likely stick to perpetual licenses, simply due to their target market preferring it. Perpetual licenses will likely continue to remain a popular choice for smaller B2C software, while most B2B software will likely continue moving into subscription models over the years.
But, remember — not everything needs to be a subscription. However, if your business can get into the subscription licensing game, it probably should.
Software licensing — Build or Buy?
As an independent software vendor, after considering the pros and cons of subscription vs. perpetual licensing models, you should also consider whether you should build or buy a product licensing solution.
Building your own in-house software licensing solution can require a significant investment — both upfront, and ongoing. From additional developer and engineering resources, to facing issues with uptime, scale and new feature development of table-stakes licensing infrastructure.
The costs associated with an in-house solution can be significant, and the hidden maintenance costs can really add up over a number of years, outpacing even the most expensive third-party solutions. In addition, the overhead of an in-house team to manage these tertiary business responsibilities can be prohibitive for any company, but especially to smaller companies. Very often, it's better to outsource these tasks.
This is where cloud-based licensing and distribution services, like Keygen, come in. Keygen provides a unique solution to software vendors with our software licensing and distribution APIs. The Keygen software licensing API provides a convenient and budget-friendly option for license key validation, device activation, and entitlements for desktop apps, on-premises software, and server applications.
We serve businesses of all sizes — from F500 enterprises, to small indie development shops. We've been around since 2016, and we'd love to help make licensing easier for your business. Sign up for free today!
Still on the fence?
If you are still wondering whether a software licensing solution is the right move for your company, take look at the numbers for yourself by using our Software Licensing: Build vs Buy calculation tool.