Licensing Paradigm Shift for ERP Software Developers

Licensing Paradigm Shift for ERP Software Developers

In the ERP space some software developers are changing the way they license their products. The change is from an up-front charge for a perpetual license, to a periodic charge for a periodic license.

This change is powered by the following changes in the market:

  • Software-as-a-Service providers (hosted ERP) typically sell their licenses on a periodic basis; either monthly or annually
  • Current economic conditions make lower up-front costs attractive to users

This change in the way that users perceive they can purchase software licenses is putting pressure on all software developers to provide a periodic license option.

These are reasons why software developers might resist offering a periodic licensing option:

  • Getting the license fee all up front is considered better than receiving a stream of revenue over time
  • Periodic billing adds administrative complexity
  • Control over license usage is difficult or impossible

Let me suggest why software developers should offer a periodic license option:

  • The preference for periodic licensing is growing, and if software developers want to appeal to a growing number of users, they will want to find a way to provide this option
  • Their competitors are doing it
  • Generally in business a stream of revenue is preferable to a lump sum, because it allows the business to better plan their operations
  • Concerns over protecting software developers’ intellectual property are mitigated when a third party hosting company is involved to administer license usage, user invoicing, and collections

To help move to offering a periodic license option, I have suggested to software developers that they conceptually separate the consulting, customization, and implementation fees from the software license. It’s reasonable that the consulting, customization, and implementation fees be invoiced up front or as they are delivered, since the costs for these services to the developer are generally incurred for specific implementations and during the period of the implementation. The value received by the user for using software is generally realized over a period of time, and generally represents no additional costs to the developer. The developer is merely receiving a royalty for the substantial investment they have made in developing software. It makes sense that the user is invoiced in conjunction with the value they receive from using the software.

The change is taking place. If you’re a software developer, do you want to participate?

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