While the technology sector sits at the forefront of innovation across every industry vertical in the modern digital economy, the legacy software licensing model lags the innovation curve and threatens to constrain value creation among business users without a more progressive approach.
As the world shifts en mass to cloud computing models, every platform-based solution or software-related technology provider now offers a subscription-based licensing model.
The resultant market saturation has compelled providers to adopt competitive pricing strategies, leading to a commoditisation of software licences in the software as a service (SaaS) sector, as price is often the only differentiator.
In response to this competitive pressure, many vendors bundle software features and functionality to extend their reach into the customer base and entrench their solutions within the organisation.
While this makes sense as a business strategy from the perspective of the vendor and service provider, as it generates upfront and recurring revenue streams, it typically means many businesses pay for functionality they do not need or only use periodically and often accumulate unused licences, adding to the costs.
This situation amounts to wasteful expenditure, which is problematic as licensing typically accounts for the largest cost in a company's tech stack. Furthermore, fixed licence costs can restrict growth for customers who need additional features or users as upgrades require new purchases.
Yet, despite this wastage, many businesses choose to maintain the status quo, simply renewing their licensing according to the traditional model without ever asking if there is a more cost-efficient option that could unlock greater value.
With the dawn of dynamic usage-based pricing, the era of the big software contract is quickly losing its relevance. Customers today are looking for a tangible return on investment (ROI), which has given rise to consumption-based licensing models that align costs more directly with usage and the value received.
Vendors today have the ability to unbundle solutions, which gives customers more flexibility as it allows businesses to choose and pay licensing fees to use the cloud-based software or services they need and nothing more.
Giving customers the ability to pick and choose only the most relevant software services creates more granular licensing options and opportunities to unlock the greatest value from expenditure on software licensing to maximise ROI, as companies use the full functionality of what they pay for.
For this shift to happen, business decision-makers must think differently about software, while vendors need to alter their contractual requirements, and resellers need to incentivise salespeople to earn commission based on usage rather than contract value to deliver the right features to customers at the right price.
Doing so will ensure the industry better matches sales to market needs, ensuring the customer gets an optimised solution and the solution provider and vendor secure recurring revenue from a product that a customer derives true value from and uses intensely.
In fact, rather than reduce potential revenue, dynamic pricing has the potential to boost income as it creates opportunities for solution providers to introduce new usage and pricing models.
By leveraging real-time environment monitoring and data analytics, solution providers can better understand customer needs to optimise resource allocation and boost operations, deploying capabilities on-demand when required, ramping up capacity in response to immediate demands or shifting customer behaviours to create more responsive organisations.
They can also use this real-time data to adopt a more scientific approach to pricing. By analysing usage patterns and customer feedback, companies can set prices that reflect the perceived value of their software or reflective pricing related to peak usage periods, making licensing a function of market demand.
Embracing this model enables software providers to adjust their licensing models to comply with international standards and regulations, which can lead to more uniform pricing across the industry.
From a client perspective, dynamic pricing creates opportunities for businesses to experiment with new features to maximise value. The ability to pick and choose solutions to find the most effective and relevant combination will deliver additional value that translates to higher retention rates.
Moreover, the flexibility and the value the model delivers to clients provide exactly what they need, making it stickier to reduce the risk of revenue or customer churn.
Against this backdrop, it is vital that the industry embraces the continuous optimisation of software licensing to ensure customers do not overspend on unused or under-utilised licences, with the flexibility to adapt licensing on-demand to meet shifting requirements as organisational needs change, to avoid over-licensing without sacrificing productivity.
A continuous optimisation approach will also ensure that companies are not left with obsolete licences and can take advantage of newer, more efficient software and service solutions in response to the rapid pace of technological advancements.
Staying on top of licence management through continuous optimisation helps maintain compliance with software agreements and reduces the risk of costly penalties during vendor audits.
In this way, dynamic pricing within a consumption-based software licensing model offers advantages for vendors, service providers and their customers, as it provides a more customer-centric and transparent approach that delivers fair pricing and tangible business benefits, as customers pay directly for the value they receive, which ultimately leads to increased revenue potential, improved customer relationships and a more sustainable business model for the SaaS industry.
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