The debate between SaaS license vs subscription models captures the ongoing evolution of software distribution.
Each approach offers unique benefits for cost management and operational efficiency.
Over the years, SaaS subscriptions have emerged as the dominant model, addressing the high upfront costs and inflexibility associated with traditional licensing.
This model offers scalable, predictable, and recurring revenues, as seen in the adoption trends of Adobe and Microsoft.
Their shift to subscriptions led to significant revenue growth, reaching billions in recent years.
In contrast, SaaS license models typically require robust systems for license tracking and compliance, which can lead to added operational complexities.
However, combining these models under a unified SaaS management strategy can optimise both cost and efficiency, particularly in larger or hybrid deployments.
What is a SaaS License?
A SaaS license is a type of software licensing model where software is accessed as a service over the Internet, typically through cloud computing.
Instead of purchasing and installing software on individual devices, users subscribe to a SaaS product and access it remotely.
This eliminates the need for upfront investments in software and hardware, and it shifts the cost model to recurring subscription fees.
A company using SaaS accounting software, for example, accesses the application through their web browser. The software and data reside on the provider’s servers.
This is not the same as traditional software licensing models, where the company would install the software on their own computers.
SaaS licensing allows organisations to optimise spending while aligning software usage with operational demands.
This model is successful because it is adaptable. Firms can add or reduce licenses as needed, making it more cost-efficient than traditional models.
What is a subscription model?
A subscription model is a business approach where customers pay a recurring fee to access a product or service.
This model has exploded in popularity in recent years, particularly in enterprise software and digital services.
Instead of making a one-time purchase, customers subscribe to a service and enjoy ongoing access, usually on a monthly or annual basis.
The subscription model is appealing because it impacts the total cost of ownership (TCO).
As we know, the traditional software purchase model is often too expensive. Not only is there a significant upfront cost, but additional fees are incurred for maintenance and infrastructure.
In contrast, subscription models spread the cost over time through recurring payments, making it more manageable and predictable for businesses.
This also offers unparalleled flexibility, allowing businesses to scale their subscriptions up or down based on their evolving needs.
The model affects every facet of the business, from sales and marketing to billing and customer support. A cohesive strategy is essential for successful execution.
This is especially important in the B2B context, where subscription models are becoming the norm. They give customers more scalability and options than traditional one-time purchase models.
Navigating SaaS license agreements can be challenging, especially with potential pitfalls and best practices to consider.
To avoid common errors, consult “SaaS License Agreement: From Common Mistakes to Best Practices.”
SaaS License vs Subscription: Key Differences
It is a common mistake to use these two models interchangeably, which only serves to confuse people about their distinct meanings. This is why we are engaged in a debate about the relative merits of SaaS license vs subscriptions.
While both relate to accessing software as a service, subtle differences impact their application and implications.
A SaaS license typically grants the customer the right to use a specific software version for a defined period.
On the other hand, subscription-based services often involve recurring payments for ongoing access to a service or platform.
This access might include updates, support, and new features, creating a continuously evolving value proposition.
The subscription model’s focus on ongoing service delivery aligns with the shift from “selling software as a product” to “offering a service.”
This change in paradigm necessitates a nuanced understanding of the ongoing obligations and benefits associated with the subscription.
The accounting treatment of SaaS licenses and subscriptions also differs. KPMG’s publication highlights the importance of distinguishing between these models for revenue recognition purposes.
SaaS arrangements are typically treated as service obligations, and revenue is recognised over the service period.
In contrast, even when delivered via cloud computing, a perpetual license may be recognised upfront if certain criteria are met.
Pay-as-you-go pricing, often seen in cloud computing services, adds another layer of complexity. This model aligns costs with actual usage, making it attractive for businesses with fluctuating needs.
Saltan and Smolander’s study identifies tiered pricing as a common model in SaaS, where providers offer different price points with varying features and usage limits.
This allows customers to select the tier that best fits their current needs and adjust their subscription as their requirements change.
To illustrate, consider two companies using project management software. Company A opts for a SaaS license for a fixed number of users and features for a year.
Company B chooses a subscription with pay-as-you-go pricing, paying only for the resources they consume.
Company A benefits from predictable costs, while Company B enjoys greater flexibility. Both companies avoid the significant upfront investment associated with a perpetual license.
For a definitive guide to these options, read “Types of SaaS License Models Explained: Find Your Perfect Fit.”
Advantages and Disadvantages
There are two primary options when it comes to choosing the right software licensing model. The two main options are SaaS subscriptions and perpetual licenses.
Each model has its own set of advantages and disadvantages, impacting factors like cost, flexibility, and control.
SaaS Subscription
A SaaS subscription is the best choice for businesses of all sizes. It offers several advantages that make it an increasingly popular option.
Firstly, the subscription model eliminates the need for upfront costs. This usage-based pricing allows for better budget planning and lower overall costs, especially for companies with fluctuating software needs.
SaaS subscriptions are also highly scalable and flexible. Businesses can effortlessly adjust their subscriptions to accommodate changing user numbers or gain access to additional features when needed.
With SaaS subscriptions, vendor management also becomes more streamlined. The SaaS provider handles maintenance, updates and security, freeing up internal IT resources.
Furthermore, SaaS applications are accessible from any device with an internet connection, offering unparalleled flexibility for remote work and collaboration.
However, SaaS subscriptions do have some disadvantages. The internet is necessary for access, which is a drawback in areas with unreliable connectivity.
Furthermore, businesses have limited control over the software’s customisation and integration with existing systems.
That’s why service level agreements (SLAs) become a big deal for mitigating these concerns.
SLAs guarantee performance, ensure uptime, and define support response times, giving businesses the confidence they need regarding service availability and quality.
While SaaS subscriptions provide flexibility, they can also lead to unnoticed costs if left unchecked.
For a detailed guide on minimising these expenses, see “Your Silent Budget Killer: How to Stop the Leaks of SaaS License Waste.”
Perpetual License
While perpetual licenses are less common in the current software landscape, they remain a relevant option for certain businesses.
The primary advantage of a perpetual license is outright ownership. Once purchased, the software license gives the customer the right to use the software as long as they need to.
This eliminates recurring subscription fees and gives you complete control over how and where you use the software.
Perpetual licenses are an excellent choice for businesses with stable software requirements and a preference for on-premises installations.
However, the upfront cost is significant, and businesses are responsible for maintenance, updates, and security.
KPMG states that under legacy accounting standards, revenue from perpetual licenses was often recognised upfront, which had a significant impact on financial reporting.
Furthermore, perpetual licenses simply do not offer the same inherent scalability and flexibility as SaaS subscriptions.
Adapting to changing needs will undoubtedly require purchasing additional licenses or upgrades, which will undoubtedly result in further costs.
Support System in SaaS License vs Subscription Dilemma
Let’s be real; choosing between a SaaS license and a subscription plan is like navigating a maze blindfolded. There are tonnes of options and considerations, and it’s easy to get lost in the jargon.
You want to make the right choice for your business and avoid settling for a software solution that doesn’t fit.
That’s why Octobits is your support system, guiding you through the software jungle.
Our platform provides a crystal-clear view of how your team uses your software, what you’re spending, and how everything works.
This empowers you to understand your needs and make smart choices about your software. It’s a control centre for all your software needs.
For example, in high-usage months, a subscription is the more economical choice, while for stable software needs, a SaaS license is the better option in terms of total cost of ownership.
Octobits provides a streamlined view, enabling firms to make data-driven choices that align with their operational goals and financial constraints.
One of Octobits main feature is SaaS license management. It is a central dashboard where you can track your software usage, view your bills, and generate reports—all in one place.
And the best part? Octobits is free to use until December 2024.
You have plenty of time to try it out, see how it works, and decide if it’s right for you. No pressure, just smart software management.
In Closing
Both models have unique strengths and trade-offs. The choice depends on an organisation’s goals, budget, and operational requirements.
There’s no longer any doubt about choosing between a SaaS license and a subscription. Octobits will clarify your software landscape and align it with your strategic goals so you can make an informed decision.
