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The 3 Licensing Models of LMS or any Enterprise Software

Signing LMS contract

One of the biggest lessons I learned while selling learning management systems (LMS) was that customers didn’t understand all the licensing options that were available to them as they entered into the buying process and as a result made poor (or no) vendor selections.  In fact, their preferred license model and true status of the budget, was almost never discussed or revealed until well into the sales process.

As I became more experienced, I found that this secrecy was not intentional –many LMS buyers are overwhelmed by all the pricing approaches and pushiness of the vendors and are not familiar with their own corporate budget and purchasing process for large ticket items.  It is easier to ignore the licensing issue until you find vendors you like — usually from a functional standpoint.

The smartest buyers though, always have a commanding understanding of their business model and to license and contract for their LMS or any enterprise software.  The smartest buyers also share budget and license preference information with vendors as soon as possible to use as a qualifier and then a negotiation chip.

Smart buyers know their requirements, use case scenarios and business case –cold, and never get the project stuck forever in contracts because of licensing and budget issues.   Because of this, they are usually very successful.

No matter how confusing vendors make all the pricing models seem, it’s really pretty straightforward.  Any vendor’s pricing and license models fall under either the annual, perpetual or consumption based license models described below:

 

The Annual License

The annual license is also known as the subscription or software as a service (SaaS) license.  It is the most popular approach into today’s HR marketplace of LMS, Talent and Performance software solutions.  Annual per-user licenses are commonly all-inclusive of license, technical support, software maintenance and hosting.

Annual licenses are usually only available in a cloud or hosted environments and not in self-hosted deployments.  This is mainly due to it being too difficult for vendors to audit usage if they don’t host.

The benefit of annual licenses are:

  • The license fees are spread evenly over the life of the 3-5 year contract.  
  • Low upfront costs –only implementation services and first year annual license.
  • Annual licenses are purchased out of an organization’s operational budget which can be easier to access than an organization’s capital budget.
  • Vendor holds much of the risk of non-performance since you can easily go elsewhere and be no worse off fiscally.
  • Vendor is responsible for the application of all updates, upgrades and maintenance of software and hosting environment.

Disadvantages of annual licenses are:

  • It’s like leasing a car.  You have to pay every single year — forever. You never own anything.
  • The longer you have an annual solution the higher your total cost of ownership.  If you calculate over a ten or fifteen year horizon, it’s almost sickening on how much you pay.

 

The Perpetual License

The perpetual licensee is the opposite of the annual license.  This is the original enterprise software licensing model.  In the perpetual model of licensing, you make an upfront, one-time purchase of the licenses and then you own them forever (in perpetuity).  You can equate this license model with going to the store and purchasing software on a CD to install on your laptop.  Perpetual is popular model for self-hosted and on-premise installations of enterprise software.  Most vendors who sell a perpetual license will also host the application for you for an additional fee.

With a perpetual license, you usually have to decide on the number of licenses you need upfront.  The cost per license decreases with more licenses, usually on a tiered basis.  With internal employees calculating the amount of licenses you need is easy –every employee needs a license.

With volunteer extended enterprise audiences, you may not be able to accurately predict future usage patters.  If you buy too many licenses, then you paid for something you are not using…maybe ever.  If you buy too little licenses, then you need to go back to the vendor and buy more.  Pricing in software typically goes up once you are a customer because there’s not anywhere else to get the licenses.

Additionally, perpetual licenses are purchased from an organization’s capital budget and not the operational budget.  Capital budgets are tougher to access and and you never know how easy or difficult it will be in the future to garner more budget due to changes in leadership or market conditions.

Benefits of perpetual licenses:

  • Provide the best return on investment over a 4+ year horizon over any license model.
  • Can often be purchased at extreme discounts  due to the large one-time investment.
  • Great model for “replacement” LMS projects where business case is already proven internally.

Disadvantages of perpetual licenses:

  • Most expensive model for upfront investment.  If your first LMS, this is uphill climb with the money holders.
  • Buyer holds the majority of risk in business arrangement with vendor.  Once you give them all your money, you lose the negotiation upper hand to get things fixed or moving.
  • Buyer is responsible for the application of all updates, upgrades and maintenance of software and hosting environment.

Perpetual licences usually have an “Annual Support and Maintenance” additional fee.  The fee is based on a percentage of the perpetual license purchase and usually runs 10-20% annually and typically starts in year 1.  For this annual fee, customers receive updates, upgrades and fixes to their licensed software as well as technical support for administrators.  Customers decide if and when they want to apply these updates.

 

The Consumption License

Consumption or pay as-you-go licenses are a great fit for extended enterprise initiatives but are rarely available for internal employee initiatives.  “Shared risk, shared reward” is a good definition of consumption license.  You only pay for what you use after you use it.  Mature vendors tend to stay away from this model in lieu of the safer annual or perpetual.  Younger vendors are willing to gamble that you will hit it big and then so will they.

Similar to annual licenses, you never own the licenses in this model, but if all goes South, buyers have very little skin or commitment in the game.  This model is really good for start up extended enterprise efforts.

Consumption based licenses can be tied to just about any usage parameter.  If you do a good job of identifying your audiences, the usage scenarios, you can come up with the perfect measurements for your business.  If a vendor is willing to negotiate consumption based pricing, they are usually willing to tie it to any metric that is measurable.

I’ve seen consumption licenses tied to registrations, enrollments, purchases, course completions, certificate completions, franchise locations and even logging onto the system.  The time frame of measuring and paying for the above can be monthly, quarterly, annually or any time period.  There is normally a tiered table of decreasing costs for increased usage but this model tends to get expensive if you are really successful.

Benefits of consumption licenses:

  • Low upfront costs are limited to implementation services.
  • Vendor is responsible for software and hosting infrastructure and maintenance.
  • Pay as you go.
  • Low risk of failure. 

Disadvantages of consumption licenses:

  • Pay forever and never own the software.
  • Highest total cost of ownership if successful –Vendors negotiate higher consumption rates than if you committed upfront for a certain amount of annual or perpetual licenses since they hold all the risk.  It doesn’t seem like a lot when you have zero sales, but it is way more than you need to pay if you know you were going to have 50,000 or 100,000 users.

 

Conclusion

No one model is correct for every organization.  Your goal is to procure a LMS or enterprise system for your organization to make money or save money.  Whatever model allows you to access and maximize the budget you worked so hard for is the correct one for your organization.  If you are lucky enough to have two models that will work, then all the more negotiating power you will have over the vendor.

Thanks for reading!

 

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John Leh
About John Leh (98 Articles)
John Leh is CEO and Lead Analyst at Talented Learning, LLC. John is an LMS selection consultant and eLearning industry blogger focused on helping organizations plan and implement technology strategies that support extended enterprise learning. John has almost 20 years of experience in the LMS industry, having served as a trusted adviser to more than 100 learning organizations with a total technology spend of more than $50 million. John helps organizations define their business case, identify requirements, short list vendors, write and manage the RFP and negotiate a great deal. You can connect with John on Twitter (@JohnLeh) or LinkedIn.

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