The Three P’s of Licensing
I don’t know if they teach this in every MBA program, but I am sure you have heard that every business case can be boiled down to a certain number of “P”s. It is just a question of how many…some have 4 P’s, some have 5; but in this world of Twitter and brevity, I am going to go with the three that matter most when you think about creating licensing approaches for software: Piracy, Portability, and Profitability.
Piracy is a hard thing to truly measure. Several organizations, such as BSA, put out statistics. But, really, it doesn’t take a genius to figure out piracy is higher in China than it is in the U.S. What matters more is figuring out how piracy affects revenue within your product’s Total Addressable Market (TAM). The key question you are trying to answer is – would those pirating your software ever really pay for it? Defining your TAM involves understanding price points of the product, demographics (geographic, age group, etc.) your product targets, and whether the product is consumer-only or Enterprise. Once you have this data, you can draw some conclusions (based on actual revenues you have from the intended audience of the product) to see if piracy is a factor you need to sweat over.
Portability is primarily about making it easy (or not!) for your customers to actually use your software. Do you want to allow the user to use the software on a specific machine, or make it available wherever they want to use it? Apple allows your iTunes library to be available on 5 computers – a somewhat arbitrary number, yet that is how they have chosen to define the portability of your library. Microsoft chooses to bind the license of their application to a home user to a specific PC. There are other software applications that measure number of active seats, but it doesn’t matter who or which machine is using them. In general, portability of the software is all about the amount of flexibility you allow, what price.
Profitability is the “P” that matters most. But it is not just a simple case of charging the highest price you can get for your product – it is more about creating the optimal price points to get most of the TAM defined above, and then measuring the cost of supporting those price models and the consumer base you have created. The net of the two numbers is your profit – and that is what you are always trying to figure out. For example, you may have a product where you can charge $1000 for a perpetual license but only 100,000 users might pay that – another 1M users might prefer an annual subscription for the product and be willing to pay $300/year. Now you have expanded the customer base. But you do have to take into account the cost of supporting subscriptions and measure the profitability of that incremental revenue you generated by adding a new business model.
Overall, it is hard to break out the three P’s above – they are intertwined. Piracy (prevention) and Portability requirements should feed into the licensing model discussion, and once you have figured out the operational cost of implementing licensing/fulfillment/delivery of the solution, you will arrive at the Profitability. It is an iterative process but a must before you roll out your product.