Subscription vs. license: When do you take your profit?

In talking with a large enterprise buyer today, I was struck by an argument he used against subscription models, open source and otherwise. Granted, he was negotiating and I've heard the inverse argument from others, but he had a good point.

The point? That an upfront proprietary license might actually work better for some IT buyers.

Subscription value is clear: The vendor is tasked with delivering constant software and support to earn the customer's business on a daily basis. No sell-them-and-run deals. It completely changes the way vendors engage with their customers.

But on the IT buyer's side, a subscription's price is likely to be higher on an annual basis than the maintenance on a proprietary license. In the first year, a subscription is dramatically cheaper. But over five years...? Or how about just in the second year, or third? It's no longer so clear-cut.

What is clear is when the vendor takes their profit: Upfront in the case of license-based businesses, and in the future in the case of subscription-based businesses. It's that niggling question of the future that may be problematic for open-source businesses.

Consider your "typical" open-source business, giving the software away and charging for support. The most burdensome year for support is the first year, when a customer is going into production. Arguably, support businesses don't see much profit from a customer until the second and third years, when the customer has become proficient with the software and needs less support.

Perversely, this is also when they have less need to pay for software support (though they may still need to pay for maintenance/upgrades), as Jon Williams noted in his OSBC keynote. Could it be that support-based businesses end up shooting themselves in the foot in their very attempt to help customers?

Back to license-based businesses. I don't like this model because it's the exact opposite problem: Vendors shooting their customers in the foot, with customers seeing little benefit beyond "Well, at least I won't have to write that million-dollar check again!" The benefit mostly flows in the vendor's direction, even if short-sighted IT buyers quickly forget about the big upfront license fee to focus on the low ongoing maintenance cost.

Perhaps MySQL and others are wise to blend the best of open source and license-based business models to ensure a more equal footing between their current and future ability to service customer needs? The object isn't lock-in but rather buy-in, buy-in that supports ongoing product development, now and in the future.

Thoughts?

[odubtaig]

Isn't it all about what you get for your money? A good example is of what I want to choose to run MS Office in if I absolutely need it but I primarily run Linux I can pay £26 every 6 months for CXOffice or I can pay £90 upfront and run OEM Windows in VMWare Server. Unless I specifically need integration between the two (and VMWare shared folders, which actually work in Ubuntu last I checked, make this less necessary) it's actually cheaper to do the latter over a two year period and a lot more compatible.

On the other hand, if I want to run games, $5 a month to Transgaming isn't a bad price even if it does amount to $60 a year.

[jimmyed2000]

This is interesting Matt.

It is a common assumption that a proprietary vendor makes their money upfront with the license fee. In a lot of cases the assumption is not valid. For example I have heard that SAP makes $4 to $5 in services for every $1 they get in license revenue. You can look at the SEC filings of publicly-traded enterprise software vendors to find out where their profit it. In the cases that we looked at they are spending about 35-40% of their overall budget on sales and marketing expenses and get 40-45% of their revenue from the sale of new licenses. In these cases almost all of the upfront license fee is used to fund the expenses of selling the software to other people next quarter. In some cases the sales and marketing teams are authorized to spend over 100% of the license fee in order to make a sale. In these situations the sale person is quite happy to make a sale that is close to (or even below) the break-even point for the company, they're just trying to make their quota. After the initial sale, in order to be profitable, the vendor will need to augment the deal with services (low margin), training (low margin) or maintenance (higher margin).

So your large enterprise buyer is possibly mistaken. He may be in the situation where he 'thinks' the vendor will be happy just making the sale but where the vendor needs to find ways to augment the sale to make any profit at all.

[jrepenning]

The open-source form of "customer retention" has been called "not lock-in: love-in." If your community involvement is allowed to keep your product in that "love-in" place, your end users will be your salesmen, and your economic buyers won't _need_ to understand why: for them, it'll mainly be a question of retaining their own best talents!