MBA Mondays: Revenue Models - Licensing
Licensing, according to wikipedia, is an authorization (by the licensor) to use the licensed material (by the licensee). Of all the business models listed on the revenue model hackpad, licensing is the least net native business model. There is very little about the internet that makes licensing work better and there is a lot that makes it work worse.
Here are some of the ways licensing can be used to build a business:
The first five items in that list are related to the software business and reflect the dominant business model for software before the internet came along. Software used to be sold (licensed) with maintenance as the recurring revenue item. The internet has largely changed that with software moving to a subscription model (SAAS) as we discussed in the subscription post. Software is still sold with a license, in fact the SAAS model doesn't change the provision of a license, but the idea that you will pay up front for a license has largely gone away in favor of the subscription.
An important and growing form of license is the open source license. There are a number of variants on the open source license but the basic idea is the licensor makes a license of the software avaialable for free for anyone to use, modify, and share. The benefits of this model is that the software is maintained and improved by a group of developers working together with no economic model around their collaboration.
The last two items are forms of intellectual property licensing where an owner of a patent or a brand will license it to someone else to use in return for a monetary payment. These revenue models can work online but they don't take advantage of the scalability of the internet. In fact intellectual property and the internet are in many ways in tension with each other.
The only form of licensing that USV is actively investing around is the open source model. We think open source is an attractive form of licensing that creates network effects in the developer and user community and we have had success investing in the open source model.
That said, licensing is probably the least interesting business model to me of all the ones we are covering in this series. It is possible that entrepreneurs will invent new ways of licensing that take advantage of the scale and reach of the global internet, in the way that open source does, and that could produce some interesting opportunities.
We will start to see smaller ‘lifestyle’ hybrid web/street level franchise/license models arising. Think hospitality biz where you don’t have the org to run restaurants in different cities so you franchise the brand, license the ‘menu’ and take a piece.For regional platforms connecting local businesses to populations here and farther afield, it is easier to license/franchise the model in Europe for example than it is to build a company to operationally run each of those.This stamp and connect, wired Alice’s Restaurant hybrid model is probably too small for AVC but interesting even if not net native.
There is a good example of that I saw just a few days ago. A successful restaurateur just opened a new restaurant in Toronto where he licensed the name & recipes of another famous one from Montreal.http://www.torontolife.com/…I’d like to see more of that actually.
Common in restaurant businesses.My buddy’s company http://rocktape.com/ has successfully done this globally.But…I’m talking about something different where there is a hybrid model and the data, the audience, builds as it connects from hub to hub. Where there is something ‘extra’ terrestrial if you will!
Are there examples?
None that I can share now. Sorry.Hybrid retail. Hybrid local though is a trend in the ‘lifestyle’ biz world for certain.
we’re seeing the big example already with the Internet. there will be models within model. it is a reverse cascade.asymmetric locally masked by symmetry globally. fractals=speciesthe way elon musk thinks about businesses is another example. the experience of visiting a tesla store scales fractally (specially) all the way through buying shares in spacex
Elon Musk right now is my man crush (sorry Fred). His holistic big ecosystem thinking, and ability to execute on it is fascinating, brilliant – motivating.
Absolutely – can forgive him re: PayPal with how he’s used the wealth garnered from that – amazing guy.
You hang with a cool crew.
His daughter was a teen bicycle racer. He was a tech exec between jobs.He spent a bunch of years selling this product horizontally to sports through doctors.Then he discovered Cross Fit! This is community commerce if there ever was.
that is pretty amazing… the cross fit community is such a unique market because of the level of fanaticism/ lemming behavior (said with love as a cross-fitter)… anytime you can find a group like that with purchasing power, good things happen.
Cross fit is uniquely powerful as they have a dedication to their products and few brands dominate any niche category. Think small niches like jump ropes that are economic as they spread easily across the community.
Arnold’s really cool in person – if you haven’t met him.
Happened with the White Dog Cafe in Philly, I think as well.
You also tap into the local expertise by doing this, and which in part is why franchise structure works – people who presumably know their market and are willing to take a calculated risk on how they see it succeeding.
religion has this franchise model, clearly it works
We need secular licensing 😉
Indeed they do.
Really all ideas, do, though. That’s how ideas spread.
Internationally a must actually.One of the big advantages of it in the states is that locally owned, which franchises are are open to all sorts of local incentives which there are plenty of for small businesses. Tax cut, loans, blah blah.
Internationally has a bigger cultural understanding / shift. There are varying cultures across North America, though the laws and systems in place sets the stage for what will occur on top of it – so culture is generally within a specific spectrum.
Per-experience license? Token model trending towards granules. Fits “Age of Abundance” paradigm.
Yes, I’d like to see innovation around licensing too. Perhaps via small chunks of functional software, embedded, self-installed, similar to the Checkout button we discussed a few days ago & where you pay and install via one click.Are there any examples?
I think the unwanted attention this would draw to companies would dissuade them from wanting to list their patents. And I imagine not everyone pays the same price, as patent holder could could negotiate starting from how much money they know a company is likely to have. This is one area trolls reign supreme at, where they just ask for $5,000 from small companies, which is basically the cost of just starting to respond in a defense.
Are you saying licensable patents ?
Association for Molecular Pathology v. Myriad Genetics (pending gene patent case) will follow Mayo v. Prometheus (unanimous triumph over patent trolls in molecular diagnostics)
that is because there isn’t much of a market for developing licensing. You the patent holder often have to approach people to do the licensing.
True – people aren’t exactly wanting to have to pay money for something they’re wanting to do if they don’t have to.
pay per use or per unit of value…
Yes. Micro-license. But are there examples? Widgets?
we are getting too caught up on the linguistic labels fred introduced. essentially, all revenue models are license models. kiip.me is an example
semantics matter… per seat, unlimited time licensing was the primary point (I think)
semantics find their license in ideas; ideas can only grow when they shed the skin of trivial linguistic fragmentation
and murky metaphors
I’m helping a company hoping to disrupt the construction software sector with its estimating software. Estimating is free. When the contractor wins a job, we charge. We know the job has been won when they post the estimate/won job to Quickbooks.Trade contractors generally like the model because they only pay at the end of the month only for work they’re getting paid for. We call it a utility pricing model–only pay for what you use. But from a bootstrapping/cash-flow perspective, I’d rather see some up front combined with the per use charge. Experimenting with that.
As I recall, that was the area @hymanroth was involved in? (ie, David Semeria – LM Framework, etc). Cool stuff when he demo’d it to me a couple of years ago.
Where is he?
I’ve become a lurker!!
Hello again 🙂
Thanks Carl.The point of LM is that apps or services should be supplied in the same way as electricity or Coca Cola: pay for what you consume.Use Photoshop full-on for a month? Pay $10. Not use it the next? Pay nothing. Easy, fair, no lock-in.I’m working on another startup now but I firmly believe the core values of LM are still valid.If I make a buck or two on Veespo, I definitely know what I’m doing next…
Hackpad being renamed Ackpad by my version of Safari.Can’t see list.It is constantly amazing how things change…….how long ago was it that a key success metric in any software company was ‘how many seats?.I think there is opportunity in licensing around best practises.
And as for the dreaded ‘bread and butter’ revenue-stream (which became ‘milking the cow dry’ as new software licence sales inevitably faded away with most legacy vendors) ‘M’ word money-spinner … Maintenance!
if we made an ETF to short maintenance models, we could get a couple hundred $M AUM http://seekingalpha.com/art…
Absolutely – looks a very interesting piece, shall read it properly later – thanks!
Covestor is also a revenue model innovator, because they enable Groupons for short selling. the next step is to scale that with a social dimension. maybe that’s what the hedge fund called “harvard” is doing — remains to be seen
And then when one factors in the nuances of perpetual licences vs annual licences, etc…
forensic accounting? $HDGE is shorting Nuance actually
It’s morbid stuff, for sure 😉
that is the institutional disconnect. the VC people who understand software help startups grow gracefully, but they don’t help tumorous old companies die gracefully. that is what short sellers in software stocks should be doing, but they are financier specialists a step removed from software familiarity
Maybe that’s where PE types of firm best come in?
I have no idea, what do you think?
In the transformation of hitherto dying – or at best complacent/stagnant – legacy companies, yes. Can be a very good thing.
The Intellectual Property Exchange http://www.ipxi.com/ is trying to start a market in something similar. A parallel to licensing.
does it scare you to see the internet model reflected?
For whatever reason this made me think of the franchising industry. It really needs an overhaul..
here is a cool franchise in developing countries http://emb.gov.ph/nswmc/PDF…
“I think there is opportunity in licensing around best practises.”Can you elaborate on that?
I think that it could be a way to distribute IP in services, without providing services.
So do you mean supporting services who then service others?
Me neither. Something about being disconnected.
That is what I am getting.
I can, and I am using safari
I am looking into B2B licensing – licensing my platform and consulting to customize it for their needs.
white label–you can do that using subscription as well, and for cash flow require some sort of up front (at least early on)
yes, white label. but it will be up front consulting to the brand and possibly ongoing consulting. up front is my new middle name.
up front replacing patents perhaps
I patent my platform, then white label it.
Great site – thanks!
I think white label is a very net native model. It is very close to subscription but has the option of “self support”
The “tension” (the one thing Newton was wrong about) between scarcity and abundance: Godwin’s Corollary for Technology: every online discussion about technology that goes on long enough will eventually mention the Singularity or Collapse.http://www.ribbonfarm.com/2…
This is too smart for me this morning.
too smart for me too! but maybe not too smart for “us”ultimate tensile strength 😉
yuri milner (physicist) is on to something. there is a reason he compares the internet to the human brain. it’s material tensile stregnth
Off Point – I clicked through to QlikView – looks like an interesting BI app
In my classes, we discuss licensing as the bst way to get something out of an opportunity where you’d otherwise fail.I like to use the “Tantalus” analogy for discussing licensing. Tantalus,who offended the Greek Gods (the Silicon Valley of ancient times) was punished by standing in a river-every time he bent over to take a drink the stream would dry up. The grape vine was always just beyond his reach, forever and ever (at least until the end of class, which to students, is pretty much the same thing). Licensing is like being able to scoop a little water out of the stream.Licensing make sense when you spot the opportunity, but lack the resources/expertise to build it out, but you can acquire some legit IP for it. It isn’t anywhere near as profitable, but you’re getting a little something for your efforts. IPeriodically, a student will develop a cool product that works well with an existing product. Start-up costs can be substantial, and they have no experience getting distribution nor running operations. They are generally a good candidate for licensing.
I think this is one area where there’s a lot of contention – patenting something purely to license it out without building it yourself incentivizes trolling at its finest.
If you have an idea but can’t execute on it, get one you can
Excellent advice in life/business. Pithy!
clearly fred, you know “gaming” and “license” as revenue model descriptors are falsely dichotomous
One of my companies has a hybrid license/subscription. We started out as exclusively a license.The up front helps with cash flow, but the sector isn’t a fan of annual upgrades, so we added an annual maintenance option and phased it in.It’s no longer optional now, and over the next year or two I suspect it will be largely annual and/or monthly subscription.
Charlie, the co-founder of Scholr.ly (a friend of mine) is in Philly today on an unexpected layover. They’ve built a really cool academic research and researcher search tool. Would you be interested/available to meet up with him today? Or, know anyone he should see? Thanks!!!
It may be least interesting to a VC but it should be a critical decision for a startup. In fact every startup founder should ask themselves if they are a business or a license. Most are better off licensing if it is an option, given that most founder/inventors are not capable of growing a business. This is a reality that the obsession with equity funding ignores or denigrates. There is a pervasive fantasy that raising funding to grow a company is always the preferable route.
You are also ignoring the model of licensing the entire startup concept to someone else, a very common path to wealth for non-software businesses.
Very few people are capable of creating that type of raw innovation value.Are you talking about licensing as a method of reaching international customers?
Its harder to get paid a license fee than it is to build and ship something these days
depends on the product
How do government subsidies skew the distribution of business models? Is the startup funding hierarchy a natural counterbalance–a sovereign order of its own?
How about image usage licences? or is that covered under which item on your list?
fred, if you’re doing revenue model set theory, and trust me (math major), that is what you are doing, you should let go of the artificial linguistic categories you have inherited from business traditions, and instead allow yourself to be the philosopher
Have any examples you can note?
i am not sure how to do that but i am open to being shown the way. i do admit that i am letting the hackpad dictate the series.
photoshop is now on a subscription model as well — $20 per month or $50 per month for the whole adobe creative suite.i don’t really see how much of a difference there is between licensing and SaaS subscription though? to me it just seems like the same thing fundamentally but with a different presentation to the customer. i agree presentation is huge and this is a noteworthy development, although in terms of intellectual property issues, i think it is basically the same.
physical nature of things changes across orders of magnititude of size. all on same spectrum, yet of different natures. all revenue models are on the same spectrum, however the native levels of tension between scarcity/abundance stretch depending on how small the time period of subscription is. you could even categorize yourself into this model on an order of magnitude
Kid, personally I think the Adobe switch is a big deal actually. Prior to “purchase” the suite you had to lay out around $1500 and then tack on upgrade costs each year. Now with an existing Serial Number you can get the entire suite and updates for $35 a month. That’s a big savings and more importantly much, much lower bar to entry. You get a higher adoption rate, still maintain lock-in, and take an active stance against pirating. Really nice move by Adobe.
oh definitely, i am a huge fan — an evangelist for it. it will earn them more revenue over the long run too. but i don’t see it how it is very different than a licensing model; i still don’t have source code seeing, editing, or distribution rights, and i still have to pay them…..and i cannot install it on more than 2 computers at a time. so to me it is like licensing but with a different presentation (which i agree is huge from a marketing and user experience standpoint).
Yes, you’re right. It really is a matter of “licence-semantics”. It’s just whether you want to get the nut up front or hope the customer sticks around long enough to justify the early entry price. I like the latter as a customer. And as a company if you continue to deliver I’ll stick with you. The Yankees are probably wishing A-Fraud’s contract was that way now. ;p
The semantics may end up making a legal difference at some point, too. To the extent that “subscriptions” are eventually expressed more like “terms of service,” or the rent of a seat to get from A to B (to use commercial airline travel as a metaphor), there may be fewer property-like rights entwined with the relationship. Arguably, “license” carries connotations that go deeper than a contract right, almost as though a licensee has an IP interest (delimited by the scope of the license, to be sure) in the software itself, not simply the use of it.Don’t disagree with anything you and the Kid are saying, just thinking what seems like semantics now could shape meaning soon.
agree with @kidmercury here…just changing the billing cycle and reinforcing their own upgrade timeline…it is a much more ‘efficient’ biz model
You also make it very difficult for competition to come in.
famous last words before google gets involved
Perhaps, but Google only has so much bandwidth to focus; Yes, they can buy more bandwidth / workers, though. Adobe can do the same, and specialization is very important for efficiencies.
Great point. The converse may apply here. Photoshop is their bread n butter. Rivals like Sketch and Pixelmator forced Adobe’s hand a bit. Good for them they didn’t end up like QuarkXPress which once had a stranglehold on the Desktop Design space and now a relic.
Print still hasn’t gone away. I still occasionally here about Quark
Never said print was gone, just Quark.
Hey There @kirklove:disqus and @ShanaC:disqus , Quark jockey here. Relic maybe, but all us old horses will tell you that InDesign is simply a poorer copy of QX, less intuitive, and real type setting controls are better in QX.And speaking of pain points, I have have CS and QX, talk about ouch on up front and upgrade costs!!!
@panterosa:disqus I’ve used them all – Ready, Set, Go (ancient!), PageMaker, Freehand, Quark, InDesign. Quark was great in its day, but they got too full of themselves and the upgrades took forever. In its prime though, you couldn’t touch Quark, it was a beast for desktop publishing.
Also less likely to become ‘shelf-ware’ with this model.
That’s a blessing and a curse. If its above a $20/month charge there won’t be any shelf-ware because people will stop paying.
.I agree with you more than you agree with yourself.Perfect Daughter is graphics artist — in school, she says: “Dad, need update to Adobe Creative Suite. Gonna cost beaucoup dinero, Dad. But YOU can pay for it on a monthly basis.”Now with a job, her company pays for it.Big deal and easier path to YES.JLM.
“Easier path to YES” – I’m stealing that line JLM 😉
.Don’t you think you should license it? Haha.
How much you charging? Ha ha. I’ll do a monthly fee, but nothing big upfront. ;p
.One BBQ sandwich per month. I am easy..
ALMOST @FAKEGRIMLOCK STYLE OF LEXICON – NO-ONE TELL HIM!
the student costs are still too high
i agree with you and Kirk more than you agree with each other
.You played trump right over us. First time ever.Old dog, new trick.Well played!.
i saw the opportunity and went for it
Sort of. The same expense is just layered out over time.The one problem is for students. Students preferred going with the one time cost because they would get massive discounts. Without that source of revenue as a form of “hook’em and bait ’em” for a lot of basic design work, why not just use something cheap/free to train on
Most of Microsoft’s business is licensing. Buying X server licenses of this or X client licenses of that for an upfront fixed price. And the product you get is typically static.Subscriptions are renting the product over time and typically you always have the latest version automatically delivered.
subscription is just licensing at higher frequency. (is there a physicist in the house?)
It’s akin to real-time licensing, rather than batch.
At a lower first year cost but, if you do a good job, at a higher customer lifetime value. 🙂
No, that is not right. Licensing is understood to mean “you give a customer a non-exclusive license to use the product in perpetuity ” The reason we don’t call it a purchase, is that you do not have the right to resell the item as many times as you want. You are granted one license. That means there are still machines running MS-DOS with MS-DOS applications (and I assure you that there are)Subscription is understood that you pay for a specific period of time. Doesn’t matter, hour, day, month, year, decade, once your period ends you don’t get it anymore.It is the same as owning a DVD versus streaming Netflix. One is a license to watch the movie forever, the other allows you to do it for a period of time.
what about salesforce? would you consider that licensing, subscription, or both? pay per seat CRM SaaS
Subscription. At its basic definition, it’s only licensing if I buy the license and have the right to use the software forever. (Of course, there are exceptions and hybrids.)
exceptions prove the rules. exceptions sit at the borders (hybrid territory) and show you whom your neighbor is.
Example: Riskalyze Pro for advisors is easily a $3,000-per-seat product for a one time license. But we only do subscriptions at $99/month or $999/year per seat.My number of customers is higher at the front end ($99 sells better than $3,000) but if I keep churn low, my lifetime value for each seat could easily end up at $5000+.
so ultimately you are scaling into relationships, which is what Wenger refers to as “the reputation economy”
Exactly. And the Free Plan we just rolled out allows us to start that relationship scaling even sooner. 🙂
Smart way to look at it of course, though to keep in mind you must maintain good relations to keep competitive.
i’m not sure reputation scales. You end up with issues based off Dunbar’s number
Reputation of a company does indeed scale, for better or for worse. :)Case in point: Microsoft, Google, Apple, Facebook.
Not for individuals though. Not in the same sense.
i guess we are just debating semantics. to me the type of subscription you are running is a type of licensing.
It is. Our terms of service grant a license. But the two revenue models look quite different on an income statement, which is the point of this discussion. 😉
the difference is openness of sourcing. wow aaron fred et al., that is quite a point.
No. The difference is when you receive the booking and the cash, and what rights that booking and cash give the customer.Typical subscription = Pay $99, license to use for one month with free upgradesTypical license = Pay $3000, license to use only that version forever
I have found it impossible to sell both. That does not mean you can’t. It is a point not a line, Adobe is definitely proving me wrong.
We’re not selling both. It would be $3K if I tried to do the licensing model. The difference with Adobe is that it’s downloaded software and ongoing usage drives no further cost for Adobe. I refuse to marry one-time revenue with ongoing costs, at least until I’m a MUCH bigger fish and the risk is better defined. I’ve seen that end badly too many times.
Ahhhh….my reading skills are poor, I glossed over the “is easily” and read is.Yes it does really end badly. Here is why. We’ve used the movie and real estate analogies. But they are not perfect in the software world.Why? Software (not games) are never really done. Its why you can’t capitalize development. You never see a software company build a product and then fire its developers. (you do in gaming but not in software that is used on a daily basis). That happens in movies and real-estateThings change people ask for features. So its easy to grow to the size of the aquarium and get stuck, when you have a revenue blip, to suck wind.
Yep, great point. I’d go even further and say that even if your features could be locked, you still have underlying platform changes that break things and require maintenance releases.
Exactly…..need to save Word documents to HTML or .PDF? Who thought about that ten years ago.
how do you justify that price spread?
Pricing is about what the market will bear.That being said, most of what I’ve seen out there has the “total customer revenue” line for SaaS crossing above a traditional license somewhere between month 20 and month 40. More art than science though.
Exactly correct. My SWAG is 30 months, right in the middle.
i’m thinking more of a marketing perspective. That pricing spread is extreme and makes me wonder what you are leaving out in terms of premium services
It’s not really that extreme. $99/month for three years is $3,564.Phil said his swag was 30 months. In my case, it happens to be right on the money – 30.3 months. 🙂
“Most of Microsoft’s business is licensing.”An often overlooked aspect of Microsoft’s success is how they have an active system of third party “tech” people who feed off and enhance their ecosystem. And all sorts of designations and special titles be-quested that keep people sucked in.There should be a MBA mondays devoted to various schemes like this.http://www.microsoft.com/le…
True. The ecosystem that keeps the license revenue flowing. 🙂
If only it were that simple. :)Did you know that you can get certified as Microsoft Volume License Certified Professional? There are even 2 different exams you can take.Exam 70-671: Designing and Providing Microsoft Volume Licensing Solutions to Small and Medium OrganizationsExam 70-672: Designing and Providing Microsoft Volume Licensing Solutions to Large OrganizationsThese exams are not easy. I passed the 70-671. It was as rigorous as any other MCP exam.If that wasn’t enough, Microsoft has an entire “competency” named “Volume Licensing”. The pre-requisite for that competency, among many other things, is employing people who passed those exams.Source: https://mspartner.microsoft…The bulk of Microsoft software is licensed through volume and OEM channels. The retail model of which you speak, where you buy a box of SQL Server and a box of SQL CALs, is not common.Increasingly, Microsoft licenses its products with what they call “Software Assurance” (SA) and some products are now available as Open Value Subscription and a normal subscription. The “license” portion is the L in L&SA.It gets incredibly confusing because the SA portion of L&SA package has one-time renewal option and it includes upgrades released during that term. This assures you that you have the most up-to-date software.To make things even more “fun”, they have Open License, Open Value License, and then various tiers of Select, Enterprise, and Campus Agreements.While the base Microsoft license does not expire, it may become ineligible for SA, which in practice makes it limited to the term of SA, which is at most 6 years.I’ll tell you what is hilarious – they are aggressively trying to sell to SMB through volume license. Can you imagine explaining this stuff to the owner of a plumbing company?Thankfully, $69.99 Windows 8 Pro upgrade (and it’s even cheaper today until the end of the month at $39.99!) is the smartest product Microsoft ever released. There are no limitations on what it can be upgraded from and the price is a no-brainer. This makes my conversations with these company owners far less painful as compared to $200 upgrades from Home to Business/Pro editions of XP, Vista, and Win7.
The delivery mechanism does not matter. When I wrote about subscription model pricing in 1999 we were selling our software to install on a server at the client, but we were charging a monthly fee. Delivering it via the internet on our servers just made it easier for us to upgrade and manage.If Microsoft decides to sell you MS Word for $5 a month, then they are selling you the product on a subscription basis. If they decide to sell it to you for $150 and you can use it as long as you want then they are licensing.It is a huge difference in the revenue model, just huge.
well, i haven’t found the infographic that shows how All revenue models are of the same dimension (licensure), but here is a pretty close one: http://venturebeat.com/2012…
One of the biggest mistakes I’ve seen entrepreneurs make is marrying one time revenue to ongoing costs. That’s what is largely driving the subscription model…cloud services cost money to deliver.If you can deliver software that has no ongoing costs…think the few App Store apps that work well without a cloud service behind them (e.g. single player games), the licensing model works fine and can drive bigger sales. (I don’t want to pay a monthly fee for Angry Birds.)
yes, but you can guess at cloud service costs and model that into your price. I’m not fully understanding the difference between licensing vs subscription beyond what you can do with the software and how to book revenue
Licensing is typically for life.You can bet on people not using your product any more, I guess?The beauty of subscription is that if you have support + data center costs, you have a revenue stream to match. (Not to mention the fact that you have a stable revenue base instead of a business that looks a lot like a movie studio.)
There are hybrid models out there. Just at the really high end, usually mainframe. You pay a one time fee and then a smaller subscription model. To quote JLM we didn’t invent sex, this is no different than buying a condominium and paying the maintenance fee versus renting.
quoting JLM is getting contagious around here!
great insight and great comment
Funny story.One time I worked for a company I’ll call MidsizeCo. I worked on the tech side, but one of their divisions sold a product with “lifetime membership” for a one-time price of $3500.As content businesses got tougher and tougher, the price kept shrinking until it got to $999 and still they offered the lifetime membership.I would ask my boss “why do we sell a product for a one-time price with ongoing costs? That seems really dumb to me.” And she would say “Because it increases sales and the CEO wants to do it that way.”That company has since been acquired by a big publicly traded company whose name you’d all recognize. I’ll call it BigCo.And despite their best efforts to shut that division down, BigCo is spending serious coin running the zero-revenue “lifetime membership” program with no foreseeable end in sight.So if you do ever make this mistake, just make sure someone acquires your company before they figure it out. Better yet, just don’t do it. 😉
I’ve always like residual business the best. Getting the moneyupfront a) takes the fun out of it and b) tends to make you spend the money that should be kept for future years because you feel richer.In a perfect world if you were disciplined of course you could take that $999 and calculate out exactly how long a customer was to stay and then sock that money away and dribble out a bit per year. But getting the money residual style is like forced savings.
But you don’t even know what to divide it by if it’s “lifetime.”
Well let’s look at an extreme.Say https://riskalyze.com/ offers a product called “lifetime personal consultation with Aaron Klein or his anointed” (for simplicity sake).And charges a fee of $10,000 for that.Well we can assume that if the product isn’t transferable a person won’t use 100 years of it.We can also assume that any user will vastly overestimate the amount of time they will remain interested in “lifetime personal consultation” with Aaron. Key point. Re-read that.So we could therefore guestimate a reasonable number of years realistically that we would get hit for. We would be high in some cases and low in others.Take “lifetime money back guarantee” on many products. Same thing. Sure 20 years later someone will come back and want their batteries replaced. But 99.99999 percent of people will stop years before.Of course the trick is making some assumptions that allow you to play on the fact that someone is going to assign higher value to “lifetime” then they will actually use.Similar: My father has a gym membership he got in the 70’s for $90 per year. The deal was he could renew every year for $90. The gym was opening and wanted members. They now charge much much more (40 years later). The assumption they made was that most people would drop out. They did. Not my dad he renews every year. From what he tells me he is the only one for maybe the last 20 years or so that has this rate. So pretend that was “lifetime” same thing different illustration. (Numbers arbitrary to make the point.)
match costs and revenues!!!!
Well said @aaronklein:disqus
I don’t think Open Source Software licensing belongs here under revenue models, except as an antithesis to these sorts of business models. All of the major OSS companies listed in the hackpad fall under Subscriptions, though services are a huge part of the market. In the Drupal world, my guess is that services cover more than 90% of it, and even in the cases of the “scalable” players I’d guess the #s from services are generally above 50% of revenue (just a guess).Another way to think about OSS is as an enabler of other business models, mostly in the SaaS space (for example, Facebook being built on PHP). In this case it’s just a tool to help build/scale the business and keep costs down (again, by cutting out license based business models), not a business model of its own.
i agree. but it is called open source licensing so i felt like i at least needed to mention it.
Gotcha. I guess the bigger point is that some of these business models are arising at the expense of others. OSS seems mainly like a reaction to the tactics of the companies using licensing as a core part of their model. It seems to me to be a great example of a Hegelian triad (thesis-antithesis-synthesis), and yes, I know that just sounded super pretentious (sorry- I couldn’t help myself- that darn liberal studies degree has to be useful sometimes!).
In my view the difference between licensing and saas/subscription is not only the up front v. over time payment but who runs the software. There is the “rent” v. “own” question which is touched on below in the thread on Adobe where you pay per month (rent) but still download and runt he software. Then there is the question of who runs the software. In the Siebel case you license it and run it on your own IT infrastructure and with Salesforce you sign in and let them manage it for you. If the customer runs the software on their equipment they can pay up front or over time – traditionally this has been upfront but Adobe is the counter example. If it is run by the software provider as in Salesforce it is almost always paid over time but even there the business model (pay commissions to salespeople on deal signing) leads them to upfront payments or at least long-term contractual commitments.
so perhaps when you work near the continuum between buyer and seller, you work for both. http://en.wiktionary.org/wi… . translating across the divide is the act of reification
I have always believed pricing and delivery are completely separate. The first is what is the model for pricing. The second is what is the model for running the software. In the history of software since the 1950’s there have been both models for each. You could timeshare an IBM Mainframe and its programs. They could run at your facility or they could run somewhere other than your facility and be connected via dedicated lines. You could buy the software or the machine or you could pay as you go.All things come full circle. The app on your phone is running on the phone, but you could charge on a monthly bais
“You could timeshare an IBM Mainframe and its programs. They could run at your facility or they could run somewhere other than your facility”Adding to that thought that companies sometimes have specific financial statement or budget reasons to agree to pay money out one way vs. the other. (Wasn’t your point but thought I’d add that.) Even sometimes paying more in the end (say by outsourcing) because it appears a different way (not something that someone running their company cares as much about unless they need financials for debt or other purposes.
.The whole issue of pricing as it relates to customer acquisition, retention and long term value is one of the most important and interesting issues related to any type of web commerce.Customer acquisition v long term value is the real focus of everything. This little graphic shows it clearly.And the big benefit of the web and access to all of humanity — particularly on businesses that are “platform” businesses and can therefore spread like the Hong Kong flu — is the ability to scale.The increase in customer acquisition — the first time buy — is driven by the perception of the size of the decision — hey, it’s only $30/month, right? Not really $360 per annum.The decision becomes a “small” decision by sleight of hand.This pricing approach has the potential to dramatically increase the initial conversion rate. It works on me a lot of times.In the case of new pricing from folks like Adobe and their Creative Suite, it really devolves to a “financing” stratagem. They are financing their programs through what looks like a low entry price for a very expensive program but they are making you a “user” — until you cannot live without them.Microsoft has effectively done the same thing with their continuing development of Windows and the Office Suite and all of their programsWhile they don’t get the money on a per month basis, they update their software, stop supporting the oldest version and force you to come along with them for the entire ride.Over a couple of years, they collect a lot of money. And remember, you are already a customer when they drag you in deeper. You almost cannot afford to leave them. They are like drug dealers.A couple subtle nuances like a few months free, the ability to cancel at any time and getting it paid for with a credit card during the free sign up period are just icing on the cake.Of course all of this — pricing — is just one of the 4 P’s which sometimes we forget apply even to stuff on the Net.JLM.
That chart is really the heart of it, economically.
Edward Tufte jokes that only two industries call their customers “users” – drug dealers and software makers, and I’m sure you agree with him on the addiction part too.
The increase in customer acquisition — the first time buy — is driven by the perception of the size of the decision — hey, it’s only $30/month, right? Not really $360 per month. The decision becomes a “small” decision by sleight of hand. This pricing approach has the potential to dramatically increase the initial conversion rate. It works on me a lot of times.The ability to recognize how something works on one-selves (is that correct english?) is so entrepreneurial. Also shows how even knowing the game being played does not make one immune to it (“easiest person to sell is a salesman” is the saying). A well played game is always admired.If you aren’t observing daily (as JLM is) what works with you and what others do and reverse engineering you can read all you want you will never be able to apply that knowledge.
As a former CEO once reminded me stiffly:- He: ‘You know what the problem with a license is!?’- Me: ‘No.’- He: ‘They can f*&ing take it away!’The one surprising thing about this post to me is how the web has created so much in the form of Derivative Works that do scale well with the web, and without the web those works would otherwise not exist — think virtual goods.As a former seller of MP3s, streams and ringtones — as well as other so-called ‘personalization’ — none of those goods would have been possible were it not for the grant of a license by the Licensor to the Licensee.Maybe vgoods and derivative works like I describe above fall into another area of this ‘Revenue Models’ taxonomy, but my experience has had me employed most of my career as the result of licensing arrangements that would never have existed were it not for the web and apps.
With apps and games/etc that give some form of visceral thrill there is less of an issue with charging – recurring or one-off, ie licensing or just ad hoc usage – with business apps, at any scale, the sheer numbness and often dubious RoI of the experience in using most of them means they have a challenge in communicating their value – the benefit/s (if any) is to another by proxy rather than usually the end-user – to management, sales, accounts, the factory floor, etc.When I was involved in big-tickets enterprise-wide systems sales the lack of tangible goods/benefits delivered for often millions of dollars meant often the customer demanded hundreds of hard-copy manual box-sets, etc, just so they had something physical to point to and equate to all the money they had spent for just a few CDs/tapes/downloads (delete according to era).Licensing in fact transcends billing/revenue issues for it also rears the ugly head of what a bit of software is actually ‘worth’ – a building or a car, a meal, or even a song, we can apportion a perceived value to, especially as we have all been consuming them for a relatively long time … but, a vacuous bit of software…?I rather liked this somewhat apt quote from Material World’s blog this weekend (which is always an excellent read, by they way)…“Until the 19th century, the term ‘to consume’ was used mainly in its negative connotations of ‘destruction’ and ‘waste’. Tuberculosis was known as ‘consumption’, that is, a wasting disease. Then economists came up with a bizarre theory, which has become widely accepted, according to which the basis of a sound economy is a continual increase in the consumption (that is, waste) of goods” ~ Petr Skrabanek.
arguably, not all open source licenses are ‘free’ ( as in freedom, not as in beer ). for instance gnu GPL and LGPL limit the integrating developer’s freedom by requiring modifications to also be open sourced. Others such as MIT and BSD and Apache do not, and imho are more free ( at least to the integrating developer ). Developers and founders *must* understand where they are getting their open source from and what licenses come with it.
How do you create revenue in the open source model of licensing?
Thank you for responding. I’m sorry but I don’t understand what that means. If the product is free, how does one make revenue?
Training, add-ons, consulting, integration, etc, etc. The product is just the baseline in such a model. Cheers!
Got it. Thanks very much.
sell personalization….i.e. get it for free, $X for getting it customized
Take a look at what redhat does.Also look at http://xen.org/ and citrix.com
Thanks again everyone
service and support
Really good concise summary Fred. For consumer internet, I understand the open source model. For enterprise, do you see open source as viable? In enterprise, there are infinitely more options and a great amount of creativity to try to tie charge to a metric relevant to the business but open source seems more difficult generally…someone like Concur processes by expense reports submitted for instance; HR software providers by number of employees; financial providers by revenue; named user, concurrent user, etc.
Good discussion below regarding SaaS and licensing, however, the major advantage for me when it comes to SaaS is the fact that it is run from the cloud. This is a big advantage for smaller companies and makes this model much better (in my opinion than subscription