A software subscription agreement (also referred to as a software license agreement) is a contract that exists between the manufacturer of the software (the licensor) and the individual or company that purchases it (the licensee). Such agreements exist to protect the purchaser against negligence or fraud on the part of the manufacturer. However, it also serves to protect the manufacturer, as well, as the software subscription agreement may include stipulations as to how the product may be used, authorized users, et al.

While it used to be customary for software companies to sell their product with a perpetual license, meaning that the customer pays for the software upfront and perhaps only pay additionally for updates for technical support, it is becoming increasingly common to find subscription agreements. There are a few reasons for this, the primary one being financial, as it creates a regular flow of income with customers paying regular monthly or annual subscription costs.

Some Specifics of a Software Subscription Agreement

First, let us take a look at the difference between perpetual license and a subscription license.

perpetual license provides the purchaser with rights to the software indefinitely. This entails purchasing the software, in full, upfront, and generally requires additional payments be made if technical assistance is required or if there are updates to be installed. While this may be appealing for some people, this also means that as technology is constantly changing, your software may become obsolete if the manufacturer is not making continual updates. It may not run on newer operating systems or computers. Typically, a license is also only valid for one user, so should additional users be required, additional licenses will need to be purchased. One benefit, however, is that once you pay for the software, you will often not have to worry about additional monthly or annual fees to have continued access.

A software subscription agreement, on the other hand, involves the purchaser paying a monthly or annual fee for use of the software. Technical support is often included in that fee, as are any software updates. The software updates often occur automatically, as well, as anyone who has had to wait for their computer to install updates, knows.

With a software subscription agreement, the purchaser is essentially leasing the software, rather than buying it, outright. In many cases, should you choose to no longer pay the monthly or annual fee to maintain your subscription, you will lose rights to the use of the software.

Software subscription agreements are additionally common among cloud computing services such as Apple iCloud and databases such as SalesForce.

Benefits of Software Subscription Agreements

While a perpetual license may be more appealing for an individual, particularly someone who only utilizes the software for basic, home use, a subscription agreement can have a number of benefits for businesses. Some of these include:

  • Less expensive, upfront. It may simply make better financial sense for your company to pay a monthly or annual subscription fee, rather than a large sum, upfront. Particularly if you have a larger company; again, the more people, the more licenses that need to be purchased.
  • Less need for in-house expertise. As many software subscription agreements provide technical support as part of the subscription costs, there is less need to have designated staff to administer the software or database. In turn, this reduces human resources costs or allows for those resources to be shifted to another area of the company.
  • Ease. As most updates to software are housed in the cloud, updates are done automatically. There is no need to install a new disk or CD, or download updates from a website.
  • Pay for what you use. In many cases, with a subscription agreement, you have greater flexibility in terms of having packages you can choose, based on your needs or only paying for what you use. This is not always the case, however, as people often do pay for storage (in the case of cloud computing) that they don’t use, or licenses that are included in the agreement that are ultimately not used.

Additionally, given the ease of the updates, it ideally means as your software will continually be compatible with whatever hardware or operating system you are using. With a subscription agreement, the software continues to grow and adapt with the other technology.

A factor to keep in mind is long-term cost, based upon your needs. Over time, the monthly or annual fee that are you paying for a subscription agreement may exceed what you would have paid, upfront for a perpetual agreement.

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