Perpetual License - What is it?
A perpetual license is one where a software application is sold on a one-time basis and the licensee can then use a copy of the software forever. A perpetual license offers a customer access to a software application in perpetuity, hence the name. The license holder has indefinite access to a specific version of a software program by paying for it only once.
For this right, the customer normally pays a one-off license fee to the software vendor. This works well in the short-term, but in the medium to long terms, as a model it doesn’t really work for either party.
As the software is updated, with security patch, bug fixes or minor feature enhancements, the one off license fee doesn’t really compensate the software vendor for their continuing attention and work on maintaining the software application. So, what normally happens is that a perpetual license is normally coupled with an optional maintenance fee (more on that a bit later).
Perpetual Licensing – an ISV's perspective
Let's talk about the perpetual license model from a software vendor's perspective. This is sometimes referred to as "perpetual licensing".
The perpetual software license is likely the simplest license model - buy the software once, own it "forever". To obtain a perpetual license to a software product, the customer pays upfront, often without being able to test the product beforehand. The drawback of this is that the initial cost can be high compared to other license models.
Historically, the perpetual licensing model has been very common as it is one of the original license models. However, software vendors are moving away from it, as there are more effective licensing models that allow software vendors to improve how they monetize their software applications.
What are the limitations of Perpetual Licensing?
There are several limitations with a perpetual software license. The first is that, once issued, the vendor in effect loses contact with the customer. This means that the vendor has limited visibility on how and even if, the customer is actually using the software. Because of this loss of connection, it is then also difficult to sell the customer additional software products or services that complement the originally purchased software.
For the vendor, a perpetual licensing also means that it has limited visibility on cash-flow over future years. While the initial perpetual license fee has been paid, the vendor doesn’t know how many of its customers may elect to purchase the optional software maintenance license in future years.
It also means that the vendor is not able to mandate that its software is kept updated. This could mean that there are sub-optimal versions of its software products in the market that have security holes, basic bugs, or features missing that the vendor now has power to improve, potentially harming its reputation among its customer base. Using software that is not secure, is buggy and is missing on features servers neither the customer nor the vendor.
Today, software vendors are moving away from perpetual licensing also because they don’t fit current consumption habits or expectations. With the advent of SaaS applications, customers expect software to be always on and always updated and always current, with a minimum (if any) maintenance required of them. In exchange, they are willing to pay on an ongoing basis for access to current, updated and value-providing software.
Software licensed under a perpetual license is also increasingly disconnected from current company models and structures. People are moving between and within companies all of the time. Projects in which software tools are required may be short-lived or have a temporary life span.
Software needs to be flexible in order to meet these fluid environments and license portability or transferability is key to being able to sell into them. A perpetual license offers no flexibility to meet such environments or needs.
Changing customer expectations lead to new license models to replace the Perpetual License
Although many would suggest that perpetual licenses are less relevant due to the move to the cloud and the increasing prevalence of SaaS offerings, this is only partly true. Demand for desktops applications is strong and will remain so for years to come.
However, even for desktop applications, perpetual licenses are less relevant as vendors increasingly want to be able to track application usage, more closely match the way in which their application will be used by a customer to the terms on which it is sold. For example, if it used only occasionally but by a number of people within a company, then a floating license would be more appropriate than a perpetual license.
Similarly, if the software is often updated with new features, then a subscription license model might be more appropriate. Perpetual licenses are less relevant because consumption patterns and expectations are changing.
For example, with subscription-based licensing it is easier for the user to start using the software as the initial cost is much lower than with a perpetual license, so there is time to get a feel for the software without having to commit right away.
Perpetual licences and the maintenance fee – The Small Print
Let us offer one more example of why perpetual licenses may not be what they claim to be.
A software maintenance fee is a fee that a customer who has purchased a perpetual license to a software application can choose to additionally purchase in order to gain access to all of the fixes, patches and minor feature enhancements for a particular major version of the application they have licensed. These are things that you generally want if you're the buyer, for reasons we have already covered.
While a perpetual license fee is normally a one-off and paid when the license is first issued, a maintenance fee is normally paid annually. If a customer stops paying the maintenance fee, then they lose the right to access any updates to the software, which can cause problems for both the vendor and the customer.
The initial license fee normally includes the first year of maintenance in it. A maintenance fee is set by the software vendor, but normally ranges from 15% to 20% of the initial perpetual license cost. For example, if the perpetual license costs $5000, then the maintenance fee, if it was set at 15%, would be $750 from year 2.
So, the cash payment for the customer (and cash receipt for the vendor) over the first five years might look like this:
So in this case, the actual cost of the perpetual license is much more than the initial, one time payment. In effect, the customer is paying for two licenses – the perpetual license, and the "maintenance license".
But can a Licensee continue to use the software even if they haven’t purchased the maintenance license?
Yes, the maintenance license is in effect a separate license which the customer has the option (but not obligation) to purchase. However, if they don’t, then they will not have the right to receive any bug fixes or patches or minor features upgrades to the licensed application that the vendor may release.
In conclusion, perpetual licensing is not ideal neither for the buyer nor the seller.