The Next Revolution in SaaS Pricing – Back to Floating Licenses?

Concurrent-floating-licensingToday, pricing for enterprise SaaS solutions is usually based on the number of users. Enterprises purchase a number of users from their SaaS software vendor for a one or three year term. When they purchase, they need to forecast what number of users they need for the upcoming term and take fluctuating factors into account like company growth or adoption rate of the SaaS solution within the time frame in question.

What happens, when the actual number is different to the number of users purchased?

If enterprises use more than they have paid for

  • a large percentage of SaaS vendors today do not notice and do nothing
  • a smaller number of SaaS vendors will cap the number of users and will not allow new user accounts to be created
  • an even smaller number of vendors will charge an overage fee for each user that exceeds the initial number of users on a monthly basis

When enterprises use less than they have paid for, the SaaS vendor “wins”.

Most IT buyers will have a “bigger appetite” than reality when they purchase a SaaS solution, or they will purchase a bit more just to be safe.

The Dirty Little Secret of the Software Industry

The fact that most enterprises purchase more users than they actually need invariably leads to under-utilization of the SaaS solution and creates shelf-ware. This dirty little secret of the software industry is leading Gartner (Software Asset Management Reaches a Tipping Point: SaaS Cost Management Eclipses License Compliance) and other analysts to advocate for Software Asset Management solutions so that Enterprises can start tracking users in SaaS applications to control and recover licenses.

Is There a Better Model?

In the mid-90s, applications were often sold per device and they still are. If products were installed but not used, they still counted towards the right to use. As a response to the fear of shelf-ware, software vendors moved to floating licenses (aka concurrent licenses). The number of installations didn’t matter, what was capped was the number of users using the application simultaneously.

The price of floating licenses is often 3-4 times higher than the price for a license per device.

Learn From the Past

Perhaps SaaS vendors should learn from the past and implement a fair pricing model which could look like this:

  • Enterprise customers purchase a number of concurrent users for a 1 year or 3 year term. This is the baseline.
  • Enterprise customers agree to pay for users beyond the baseline on a monthly, daily or hourly basis
  • SaaS vendors provide visibility into the number of users, show trends, audit trails etc.
  • SaaS vendors invoice on a monthly basis for all users exceeding the concurrent limit on a price that has been negotiated as part of the initial purchase.

SaaS vendors – what do you say?

 

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