Is per-seat licensing sabotaging some software’s potential?

Is per-seat licensing sabotaging some software’s potential?

A look from the other side of the fence for once - should vendors consider shifting towards performance-based licensing instead?

Published on 21st May 2024

These days, businesses are no longer as willing to accept the status quo in their relationships with technology companies. Instead, there’s a movement underway where enterprises actively seek partners that align with their business goals of driving substantial and measurable outcomes.

For a good example of this shift, let’s look at the traditional per-seat software license model in which a business is charged a fixed fee for each user to access the software. Although uncomplicated, predictable and still quite common for enterprise and mission-critical software systems, the per-seat model has increasingly been perceived as outdated and problematic compared to the performance-based license model because it fails to align the software provider’s incentives with the needs of the business.

In this article, the case is made for why forward-thinking decision-makers should consider shifting toward performance-based software licensing where cost is ultimately reflected in usage, and why this shift is essential if enterprises are to incorporate automation to mitigate staffing challenges and rising wages.

The Pitfalls Of Per-Seat Licensing

Let’s start by taking a closer look at why software companies are more than happy to offer the per-seat licensing model to their customers. At the top of the list is revenue, or more specifically, a predictable revenue stream based on the number of licenses sold. By tying revenue to the number of individual users, the software company benefits financially every time the customer needs to add a seat because of business growth.

Additionally, the software company benefits from the per-seat revenue stream regardless of usage. For example, let’s say your business has five employees who need to access the software system as part of their roles with the company. Four of the five use the system intermittently, while the fifth person uses the system all day, every day of the work week. In this scenario, the business still needs to purchase five seats even though four employees are offline and not using the system most of the time.

Now, let’s examine the negative effects the per-seat license arrangement can have on your business.

Misaligned Incentives

Unfortunately, the core incentive structure of per-seat licensing can financially motivate software companies to increase the number of individual licenses sold over enhancing their software efficiency or automation capabilities. Furthermore, this misalignment can suppress innovation in ways that reduce the need for human intervention and streamlined operations.

Cost Inefficiency

In mission-critical systems where reliability and efficiency are paramount, per-seat fees can also lead to excessive costs without the corresponding corporate benefits. As companies scale, the cost of additional licenses often becomes a significant financial burden, necessitating the diversion of funds from potential investments in innovation.

Limited Scalability And Flexibility

Per-seat licensing restricts flexibility and scalability, two crucial areas for enterprises facing variable workloads and fluctuating user counts. It can force companies to purchase extra seats to accommodate peak periods, even if those seats remain unused most of the time, resulting in wasted resources.

High Upfront Costs And Lowered Service Quality

Adopting a per-seat licensing model often involves significant upfront payments, making it a capital-intensive choice. Once these fees are paid, the business is largely at the vendor’s discretion for support and services. Additionally, vendors might be tempted to impose extra charges for essential services, exploiting the financial commitment already made by the client.

The Case For Performance-Based Licensing

Now, let’s turn to performance-based licensing to see why I believe it’s the better alternative for enterprise organizations. I’ll make my case by again focusing on alignment, cost, innovation and flexibility, but this time from the businesses’ perspective.

Alignment With Business Outcomes

Performance-based licensing models tie software costs to the results delivered, such as increased productivity, revenue growth or cost savings. This incentivizes software companies to focus on developing features that contribute directly to their customers’ success.

Cost Transparency

Performance-based licensing offers greater transparency in software costs because pricing is based on measurable informatics rather than blurred pricing structures that only benefit the provider. This transparency helps enterprise companies better understand the value proposition offered by the software and make informed decisions about its usage.

Encouragement Of Innovation And Automation

Shifting the focus to outcomes encourages software providers to maximize automation and reduce the need for continuous human input, a topic especially relevant in today’s business climate as staffing issues and rising wages persist.

Adaptability To Changing Business Needs

A performance-based software license offers greater flexibility, allowing companies to adjust their usage and costs according to their actual business performance and immediate needs. This adaptability is crucial in a dynamic business environment.

Seek Partnership

It is this writers belief that the shift toward performance-based licensing is beneficial and necessary for modern enterprises because it promotes a better alignment of incentives and encourages software companies to focus on delivering genuine value through innovation and automation. Paying for a per-seat software license rather than a performance-based license mostly leads to a sacrifice in other areas, namely business efficiency and cost-saving automation.

Purchasing a software license is like buying a house, except the partnership and control offered to the business in the performance-based model serve as the foundation needed to turn that house into a hotel.

Your business might only need a house today, but choosing and using the right software licensing model can allow it to grow and evolve to a point where a hotel is required. With the performance-based model, the software company is the one that invests in the build-out of the hotel and your business is only charged based on the number of people checked into the hotel.

On the other side, enterprises that adopt the performance-based model can benefit from far fewer barriers (financial and operational), and they can become more competitive, agile and cost-efficient as they position themselves as leaders in the digital age.


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