Subscription-Based Pricing and the Cloud
Traditionally, vendor lock-in has given vendors substantial control over customer relationships. Still, a perpetual license allows customers to keep using software even if they stop paying for support—although they do lose access to updates and security patches. For example, Rimini Street generated more than $430 million in revenue last year by providing third-party support for perpetual licenses, replacing what could have been more than a billion dollars annually for the original vendors.
Increasingly, vendors are moving to subscription-based pricing models, which offer two main benefits. From an investor’s perspective, companies with recurring revenue models are more valuable due to their steady income streams. Subscription models also create the ultimate lock-in: Customers who stop paying immediately lose access to the software. This has an instant, powerful impact on retention. With software hosted on the vendor’s cloud, vendors gain complete control over access, further ensuring that customers cannot use the software without an active subscription.
As more companies migrate their IT systems to cloud platforms, vendors are offering highly attractive deals to transition businesses onto their platforms, sometimes even allowing customers to trade perpetual licenses for low-cost subscription plans. This approach is similar to the classic truck leasing model: a leasing provider offers to replace a company’s mixed fleet of old and new trucks with brand-new leased trucks at an attractive price, saving the company money and upgrading its equipment. However, after an initial 3–4-year period, renewal costs may jump as high as three to five times the original rate, leaving the company to choose between paying the higher price or facing major disruptions to its business.
Applying this model to IT infrastructure, replacing cloud services with new hardware and software—if perpetual licenses are even available—incurs high costs for delivery, setup, and maintenance.
Today’s subscription model elevates vendor lock-in to an all-time high, as exiting these arrangements can be costly and complex. Many vendors are even sunsetting other licensing models in favor of more predictable and profitable subscription options.
Vendor lock-in permeates all industries, from Tesla and Apple to Oracle and Microsoft. When any vendor offers a deal that seems too good to be true, it’s essential to carefully weigh the short- and long-term implications. Vendors decide how to license and price their products, so understanding these choices is critical.
There is no one-size-fits-all answer for organizations facing these decisions. Should you trade in your perpetual license for a subscription model? Should you move to the cloud? If so, whose cloud should you choose? Do the benefits of a proprietary product or feature outweigh its limitations?
Navigating today’s complexities has led to the rise of the trusted advisor. In a future article, we will explore when to engage a trusted advisor and how to choose the right one.
We began this article by looking back at the nearly comical idea that, in the early 1960s, customers of the omnipresent “phone company” could only purchase or use phones made by AT&T’s subsidiary, Western Electric. As absurd as that now seems, we should remember the adage, “The more things change, the more they remain the same.”