One of the most eye-opening lessons I learned when selling learning management systems (LMS) is that customers entering into the buying process typically don’t understand all the licensing models available to them.
As a result, they tend to make a poor vendor choice – or none at all. In fact, many customers don’t discuss or even disclose their preferred licensing model and true budget status until the sales process is well underway.
Over the years, as I became more experienced, I realized that this secrecy is not intentional. LMS buyers are often overwhelmed by vendor sales pushiness and various pricing models.
In addition, many aren’t familiar with their own organization’s budgeting and purchasing processes for large-ticket items.
They erroneously assume that it’s easier to ignore licensing models until they find vendors they like. And that choice is usually driven by functionality.
What Do “Smart” LMS Buyers Know About Licensing Models?
In contrast, the smartest buyers always have a commanding understanding of their business model, their preferred software licensing model and contract structure when they’re selecting an LMS or any enterprise software.
These “smart” buyers also share budget and license preference information with vendors as soon as possible. This becomes a short-listing qualifier and eventually is a bargaining chip during contract negotiations.
Smart buyers also come to the process prepared. They develop use case scenarios in advance. 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.
As a result, 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: Top 3 Licensing Models
No matter how confusing vendors may make various licensing models seem, it’s really pretty straightforward. Pricing typically fits into one of three categories – annual, perpetual or consumption-based licensing models.
I’ve described each variation briefly 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 in today’s marketplace of HR-related learning, talent suites and performance management software solutions.
Annual per-user licenses are commonly all-inclusive of the license, technical support, software maintenance and hosting.
These licenses are usually available only in cloud or hosted environments, but not in self-hosted deployments. This is primarily because it’s too difficult for vendors to audit usage if they don’t host.
Benefits of an Annual License:
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 the 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 include 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 the first year.
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, but never own the software.
If your learning initiative is successful, this LMS licensing model results in the highest total cost of ownership.
Because vendors hold all the risk, they negotiate higher consumption rates than if you commit upfront for a specific number of annual or perpetual licenses. When you have zero sales, this isn’t a high price to pay. But, for example, if your reach expands to 100,000 users, the cost of serving that audience will be far steeper than you’ll want to pay.
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.
The right model for your organization is the one that lets you access and maximize the budget you worked so hard to win. If you are lucky enough to choose between two models that will work, then that means you have even more negotiating power with vendors.
John Leh is Founder, CEO and Lead Analyst at Talented Learning and the Talented Learning Center. John is a fiercely independent consultant, blogger, podcaster, speaker and educator who helps organizations select and implement learning technology strategies, primarily for extended enterprise applications. His advice is based upon more than 25+years of learning-tech industry experience, serving as a trusted LMS selection and sales adviser to hundreds of learning organizations with a total technology spend of more than $100+ million and growing. John would love to connect with you on Twitter or on LinkedIn.