ERP software licensing: purchase or subscribe?

With many ERP systems you are no longer required to purchase the software licenses. A subscription model is increasingly popular: periodically paying an amount to obtain the right to use the software. But which model fits best with your organization?

Purchase software

In the traditional model, you buy the software licenses. You pay for the licenses in advance and thereby acquire the right to use the software indefinitely. The purchase of licenses is a major investment for many companies, but it does make you the owner of the software. These are not your only software costs. Often you are required to pay an annual fee for maintenance and/or for support.

Pay per use

Using ERP software in a subscription form, called "subscription licensing", is becoming increasingly popular. You then pay a monthly (or sometimes yearly) fee in advance that allows you to use the software. This amount is based on the number of users and the solutions and modules that you need. Every month you can stop your subscription or change the modules and the number of users in your subscription - up or down. Subscription licensing often includes the infrastructure, maintenance and support in its monthly fee.

"You can make a well-informed decision after meeting with finance, IT and strategy/business."

Factors that influence your decision

  • Financial considerations: Buying software requires a substantial investment and not every organization can afford this. With a subscription model you don’t need much capital and therefore have low start-up costs. But after a few years (often 3-6 years) you reach the point where the Total Cost of Ownership for the subscription model become higher than for purchasing the licenses.
  • Flexibility/scalability: Once you have purchased software licenses, they remain valid infinitely. And if your business grows, you can purchase additional user licenses. Downscaling however, is not possible with most ERP partners. If you need fewer users than what you have paid for, a part of the licenses becomes idle. With subscription licensing you won’t have to deal with this problem. You can upscale and downscale every month, providing you ultimate flexibility. In other words: "Pay per use".
  • Importance of upgrades and new technology: Do you decide to go for an ERP system with the intention to run on the same version for years, or are new releases and modern technology crucial for you to achieve and maintain a competitive advantage? The answer to that question largely determines which licensing model suits you best.
  • Ownership and control: Do you want to own the software licenses and run the software on your own servers? Or do you want this to be taken care off for you? Subscription licensing often goes hand in hand with using the software as a cloud application or hosted solution. Unacceptable for some organizations, because they want complete control over their ERP system. For other organizations it is a big plus, because they no longer need to have the resources in-house for this.

Subscription licensing offers an additional option for companies. You are no longer required to purchase software licenses. You can make a well-informed decision after meeting with finance, IT and strategy/business.

Philip van Kemenade is marketing manager at Dysel and is in contact with software end users every day.