Buy or Subscribe:

The Case For I.T. Subscription Based Licensing

What does it takes to shift from a perpetual capex based licensing model to an opex based subscription model for I.T. hardware and software? 

The benefits of moving to flexible subscription pricing are clear, but common misconceptions hold companies back.

The way companies like to purchase software and hardware is changing: there is an ongoing movement to flexibly, without big up-front investments, and with pricing that reflects the business value they derive. However, daunted by the challenges of transitioning to subscription, and vendors restrictive lock-in pricing models, it is often difficult for companies to make the transition.

These challenges should also matter to vendors, as moving companies should increase loyalty and increase lifetime value from existing customers. Subscriptions can also have many benefits for companies as outlined below.

What Vendors and their Customer Companies Both Need To Understand

Companies can move past the misconceptions about transitioning to a subscription based opex model and understanding four key facts can help:

1. 'Subscription' doesn’t always mean 'cloud'. Although software as a service is the right long-term strategy for most companies, vendors should be able to offer flexible and easily adjustable options including managed on-premise solutions.
2. Subscription pricing can and should be a win-win between vendors and customers companies. Prove the business value creates an easier internal sell for IT leaders, to sometimes reluctant peers.
3. Vendors should offer a combination of perpetual and subscription models for the same product. This can enable companies transition from a perpetual to subscription model in a phased manner and build trust in the partnership, as well as a lower risk transition path.
4. Put emphasis on the real advantages for the company. Giving up perpetual licensing and migrating to subscription based models gives an opportunity for the company to clean up years of multiple complex perpetual contracts and eliminate unused licenses, allowing the negotiation of a cost effective subscription contract aligned with the true needs of the business.

Adapted from a McKinsey Technology-Media & Telecoms article, for further insights see: https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/subscription-myth-busters