Written by Conner Zinanti
This post was first published on Simple Programmer
Software licensing, a process often overlooked or hastily implemented to meet product deadlines, is a key ingredient to increasing value to your users, as well as increasing revenue to you.
Businesses and software developers must carefully consider the impact licensing has on revenue, customer retention, and the software development cycle.
I recommend utilizing creative licensing strategies to increase the value of your application. Your licensing strategy doesn't need to be exclusive to your application or something that has never been done before, but it does need to be applicable to your product offerings, such as licensing by product features, term licenses or usage licenses.
The goal of licensing is to provide product offerings that best meet your customers’ broad and diverse needs, while simultaneously reducing their costs associated with licensing.
Let’s consider the “whys” and “whats” of software licensing with how you can determine which form of licensing is best for your application.
Why Should You License Your Application?
Plain and simple, money. It takes countless hours and resources to develop software. Thoughtful licensing enables you to capitalize on this investment. Licensing increases your revenue through recurring payments.
Selling software outright for a single up-front payment often reduces affordability and can deter potential customers. Creative and flexible software licensing has three key advantages:
- It increases affordability for your customers.
- It provides control and security for your software.
- It protects your investment.
Let’s take a closer look at each of these three advantages.
Increased affordability: By eliminating up-front costs and offering your customers smaller, continuous payments, you lower the barrier to access your software.
In doing so, you’ll attract those customers who are unwilling to pay the large upfront payment. This way you can also attract customers who only need to use your application for a short time period and cannot justify the initial investment. Increased affordability leads to more customers, which equals more revenue.
Control and security for your software: Software licensing gives you control over who has access to the application, for how long, and which features they can access. You can prevent unauthorized access or overuse by those with limited access, thus securing revenue for each use of your application.
Protection of your investment: Whether it’s end-users who unknowingly install more instances of your application than were paid for, or malicious users that try to hack your software, both threaten the integrity of your application and bypass revenue collection. A well-executed licensing strategy ensures that your customers pay for what they use.
What Software Licensing Strategies Yield the Best Outcomes?
Usage-Based Licensing: This provides the end-user with a predetermined amount of uses or tokens in the application.
An example might be printing a report. The customer can utilize the application, but they must pay to print the report. When your customers run out of uses, they must purchase additional uses or tokens, creating an event that generates revenue and ensures payment.
Time-Based Licensing: It grants an end-user access to your application for a certain period of time. Upon expiration of the license period, the user must purchase additional time to continue usage, creating a revenue-generating event.
Licensing monthly or yearly are common approaches. Monthly licensing generates more revenue collection points but allows customers to cancel their subscription. Yearly licensing typically offers a discount and is paid in advance, locking in the customer for a full year.
Feature-Based Licensing: Exactly as the name implies, it enables or disables specific features within the software. A frequently used feature-based licensing strategy includes Basic, Basic Plus, and Premium. Attract customers with a less expensive, Basic version that offers fewer features. Your users must purchase the Basic Plus or Premium software to gain access to additional features and utilize the application to its fullest potential.
Four Ways to Develop Your Licensing Strategy
Let’s now discuss the four ways to develop your licensing strategy: home-grown solutions, software solutions, cloud solutions, and hardware dongle solutions. Each has distinct advantages and disadvantages.
Home Grown Software Licensing: A home-grown licensing solution is one that is developed internally, in-house. These solutions are created by in-house software developers whose focus is on application development, not licensing.
Without this focus, only a basic level of licensing options is typically incorporated. This solution can be cheap to implement as the developer is already on staff, but it’s hard to maintain if upgrades are needed, and can become costly and inflexible over time.
Software-Based Licensing: Software-based licensing utilizes third-party software to implement licensing. Many vendors offer automatic protection where no changes to the source code are required, but using automatic protection provides less control over what can be licensed.
To access the protected application, license keys are stored locally on the end user’s computer and do not require connection to the internet.
Cloud-Based Licensing: Cloud licensing, like software licensing, utilizes third-party software to implement licensing and also offers automatic protection (no changes to source code).
The difference is where the license key is stored.
With cloud-based, the license is stored on the cloud and the computer must be connected to the internet to access the software.
Hardware-Dongle Based Licensing: Hardware-dongle licensing is similar to software and cloud-based licensing in that it utilizes third-party technology to enforce licensing.
Dongles can be implemented using automatic protection or via source code integration. When integrated at a source-code level, licensing can be tailored to suit you and your customers’ needs.
To access the application, the licensing key is stored on a physical dongle that must be present and plugged into the computer. Having an external piece of hardware vastly increases security and adds portability. Connectivity to the internet or a license server is not required.
Put a Creative Licensing Strategy to Work for You
Determine which strategy to implement by identifying your product offering as a whole and asking yourself three questions:
- What is the life cycle of my typical customer, and do I get repeat customers or are they one and done?
- Are there extra features of my product that may be deemed unnecessary to the ideal customer?
- Are my customers implementing my single product offering into multiple devices?
For question No. 1, if your customers make use of your products for multiple months or even years, then time-based licensing may be for you. This will allow you to lease your application to them for the duration needed and enable you to create recurring customers as well as revenue throughout the life of the end-user.
If you are distributing an application that comes with what could be three to four different product offerings, then feature-based licensing may be the best, as you can offer one core product and the additional features as add-ons, which they can purchase at a later date or when needed.
Finally, if you believe your customers are implementing many instances of your application, I would enforce a usage-based licensing strategy. Usage-based licensing prevents end users from purchasing a single product of yours and installing multiple instances of your application onto multiple machines.
Usage-based licensing would be great in this scenario if, for example, your end-user needs the application to be installed on a dozen different machines; each time it is accessed or used, you are being paid.
Secure Your Application, Secure Your Revenue
When you bring a product to market, there are two things you must do: secure your application and secure your revenue. Licensing your product enables you to secure both.
Whether you choose software-based, hardware-based, or cloud-based software licensing, you can be certain that you’ll have the capability to expand your market share and increase your revenue through creative, recurring licensing strategies.
You will also ensure protection of your investment by preventing unauthorized use and distribution of your application.
Do not sell yourself or your product short. You have put immeasurable time and energy into bringing your application to market, so reward yourself with secured revenue and a secured application.