OK, I admit it. I was totally drawn in by the provocative title of James Governor’s post. It was that “pathology” word that got me. According to Meriam-Webster:

pathology

Function:

noun

Inflected Form(s):

plural pa·thol·o·gies

Etymology:

New Latin pathologia & Middle French pathologie, from Greek pathologia study of the emotions, from path- + -logia -logy

1: the study of the essential nature of diseases and especially of the structural and functional changes produced by them  2: something abnormal: a: the structural and functional deviations from the normal that constitute disease or characterize a particular disease b: deviation from propriety or from an assumed normal state of something nonliving or nonmaterial   3: deviation giving rise to social ills pathologies…and crime

Well, it’s easy to see that I could have a load of fun with these! After all, I have a decades-long history of the gladiatorial combats that James and the linked material describes. That notwithstanding, a major point made in the article(s) centers on the inequity of the perpetual license model (sometimes incorrectly called the ‘enterprise license’ model). Presumably, the answer is software-as-a-service (SaaS) and its pay-as-you-go pricing model.

Let’s take a look at each pricing strategy, and the benefits and drawbacks of each…

Perpetual Licensing vs SaaS

Here are the characteristics of the perpetual licensing model:

• A license is bought for a negotiated up-front fee
• The license is a contract containing many restrictions on use and transfer
• The license requires that the buyer purchase “annual maintenance,” usually for a fee of 15%-30% per year (this is the “perpetual” part )
• Upgrades are usually incorporated as part of maintenance
• Installation services may also be “required” or “recommended”
• The software vendor may do some or all of the installation work. In addition, for important deals, the vendor may add functionality specifically to close that deal.
• The liquidity of the purchased “asset” is small, especially if license-transfer rights are limited by contact

The SaaS licensing model is essentially the converse:

• Use of the software is “rented” to the customer in return for a monthly or annual fee
• Since we’re talking about a rental, transfer rights are moot
• Annual maintenance fees are essentially “rolled into” the rental fee
• Upgrades are free (and automatic)
• Installation services may still be required, but most SaaS vendors try to limit their need by simplifying the product offering
• This one-size-fits-all “simplification” of the SaaS product may leave some functionality holes. If a customer can’t live with the omissions, The SaaS vendor usually simply writes off that customer.
• Again, the liquidity of the asset is not applicable, since no asset is purchased.

Price – A Key Buying Criteria

How does a buyer compare prices between a perpetual license offering and a SaaS product?

The answer is to compare the total cost-of-ownership (TCO) of each. Of course, this can be tough given all the variables. But let’s make some assumptions and have at it!

Let’s assume:

• Perpetual license vendor
• License cost = P
• Annual Maintenance = 25% of P
• Install cost = 2 x P
• Hardware cost = 25% of P
• SaaS vendor
• Monthly usage fee (“rent”) = P / 25
• Annual Maintenance = 0
• Install cost = 2 x P
• Hardware cost = 0

In any such analysis, the duration of “current lifetime” is key. Let’s assume that P=1, and look at the results for the first three years.

As we can see, in this 3-year-timeline example, the SaaS solution is favored. This result is often the case, especially when the residual value of the perpetual license is valued at zero (as it is here).

Of course the analysis leaves out some items, such as the much-lower switching cost of SaaS, and the resultant high motivation of the SaaS vendor to provide good service and prevent churn.

What This Means for Untangle

We are big believers in the subscription model, and 100% of our offerings are available solely by subscription. Furthermore, we have tried to keep our customers’ upfront costs to a minimum, as evidenced by our ‘Re-router‘ product for Windows (soon to enter Version 2). Thus, our actual TCO advantage can more approach the ‘SaaS (best case)’ line on the chart above.

What do you think? Is our subscription-based, software-download model (much of it free) on track – or do you prefer appliances (and their up-front cost and replacement cycle)?

Inquiring minds want to know….