One of the most eye-opening lessons I learned when I sold learning management systems (LMS) is that customers often don’t understand all the available licensing options when they enter into the buying process. As a result, they tend to make poor (or no) vendor selection. In fact, their preferred license model and true budget status are almost never discussed or revealed until well into the sales process.
Over the years, as I became more experienced, I realized that this secrecy is not intentional. Many LMS buyers are overwhelmed by all the pricing approaches and pushiness of vendors, and many aren’t familiar with their organization’s own budgeting and purchasing processes for large-ticket items. These buyers erroneously assume it is easier to ignore the licensing issue until they find vendors they like — usually from a functional standpoint.
In contrast, the smartest buyers always have a commanding understanding of their business model, licensing model and contract for their LMS or any enterprise software. These “smart” buyers also share budget and license preference information with vendors as soon as possible to use as a qualifier and then as a bargaining chip during contract negotiations.
These buyers come to the process prepared. They have developed use case scenarios. They know their requirements. They know their business case — cold — and they never let the project get stuck endlessly in the contract phase because of licensing and budget issues.
Because of this, these buyers are usually very successful — not just in completing the purchase process, but in finding an LMS that actually works for their organization.
LMS Pricing Models: 3 Ways to Play
No matter how confusing vendors may 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:
1) 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 marketplace of HR-related LMS, talent suites and performance management software solutions. Annual per-user licenses are commonly all-inclusive of license, technical support, software maintenance and hosting.
Annual licenses are usually available only in cloud or hosted environments, but not in self-hosted deployments. This is mainly because it’s too difficult for vendors to audit usage if they don’t host.
Benefits of an annual licence:
- Payments 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.
- Vendors hold much of the risk of non-performance, because buyers can easily go elsewhere and be no worse off, financially.
- Vendors are responsible for the application of all updates, upgrades and maintenance of software and the hosting environment.
Disadvantages of an annual license:
- It’s like leasing a car. You have to pay every single year — forever. You never own anything.
- The longer you commit to an annual license solution, the higher your total cost of ownership. If you calculate over a 10-year or 15-year horizon, it’s almost sickening how much you pay.
2) 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 a 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 number of licenses you need is easy to calculate — every employee needs a license.
With volunteer extended enterprise audiences, you may not be able to accurately predict future usage patterns. 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 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 a perpetual license:
- Provides the best return on investment over a 4+ year horizon, over any license model.
- Often can be purchased at a significant discount, due to the large one-time investment.
- Great model for LMS “replacement” projects, where the business case is already proven internally.
Disadvantages of a perpetual license:
- Most expensive model for upfront investment. If this is your first LMS, it is likely to be an uphill climb with financial sponsors.
- The buyer carries the majority of risk in this business arrangement with the vendor. Once you give a vendor all of your money, you lose the negotiation upper hand to get things moving or get things fixed.
- The buyer is responsible for implementing all updates and upgrades, as well as maintenance of the software and hosting environment.
Perpetual licenses usually have an additional “Annual Support and Maintenance” fee. The fee is based on a percentage of the perpetual license purchase, which typically runs 10-20% annually and 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.
3) 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 startup 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 timeframe 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 a consumption license:
- 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 a consumption license:
- 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.
No single model is perfect for every organization. Your goal is to procure an LMS or enterprise system that fits your organization’s needs, while helping the organization save money or make 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 that means you have even more negotiating power with vendors.
Thanks for reading!
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- Strategies to avoid costly, time-consuming missteps
- How to get started, stay on-track and measure results
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