Enterprise Licensing for SaaS: Breaking the Glass Ceiling or Mortgaging the Future?

I listened to salesforce.com’s earnings call the other day and was intrigued by the announcement of enterprise-style “licenses” for some of their largest accounts. Though the exact details of the licenses were not disclosed, an enterprise-style license for a large organization is typically an “all you can eat for one price” type of sale. This style of license has been a mainstay of on-premise enterprise application selling for decades (has it been that long?).

As CMO of a SaaS-based solution provider, the question of license versus subscription-based selling is of particular interest to me. To the mutual benefit of customer and vendor, SaaS-based solutions have been subscription oriented with customers purchasing on a “pay as you go” basis. Annual and multi-year contracts are common, as customers want to lock-in pricing for a period of time. The idea of selling an “all you can eat for one price” license to an application customer definitely has its good and bad points.

First the good side of the licensing over subscription model. Simply stated, enterprise-style licensing helps customers with huge amounts of end users cap and control the subscription expense incurred with a SaaS-based service. The breakeven point for moving from a subscription to a license obviously varies by offering, so I’ll let that question be addressed by other bloggers, vendors and industry luminaries. Enterprise licensing makes the expense predictable regardless of the number of users for the customer and helps to justify moving very large organizations to a SaaS-based application. As an example, salesforce.com recently announced an enterprise-style sale at Symantec with 25,000 users. The license pricing model helps SaaS vendors break a glass ceiling that we all knew was there because we knew that it would be problematic to cost-justify the SaaS subscription model to very large enterprises with tens of thousands of potential subscription users.

Then there’s the bad side. Pay as you go subscription pricing is typically treated as an operating expense, a good thing in a bad economy. Operating expenses are preferred in challenged economies because they typically do not require executive level approvals, long term commitments, large upfront cash outlays and special accounting treatment. License-based services are typically treated as capital expenses requiring executive approval, long term commitments and large upfront cash outlays. However, the biggest concern about license selling is the impact on the SaaS vendor because license sales usually imply huge discounts and there’s no ongoing revenue stream if all the revenue is recognized immediately. Getting all the cash upfront may seem like a good thing on the surface, but it is problematic for a SaaS-based service because it’s back to the good old enterprise selling days (were they ever?) of having to find more big license deals every quarter to demonstrate continued sales and revenue momentum. I like a comment that Peter Goldmacher of Cowen and Company made to me regarding enterprise licensing, “Forward selling always seems like a good idea at the time, just like that sixth drink.” The challenge of enterprise-style licensing is that the SaaS vendor has capped their revenue stream from the customer. If the cost of delivering the SaaS service goes up or the customer adds more users, the revenue stream is fixed. From the customer’s perspective, if they have to reduce the number of users, they now have “paid seats on the shelf” in effect raising their average cost per active seat. The implicit “pay for what you need when you need it“ advantage of a subscription-based service is lost.

Enterprise licensing for a SaaS-based service is an interesting and potentially challenging new concept. On one side, I like the idea of making SaaS more attractive to the whale-sized enterprises with tens of thousands of potential SaaS users. But on the other side, it starts to change the very fabric of selling SaaS and the very reasons for buying SaaS. It also leaves a number of unanswered accounting and business questions. From the accounting perspective of the SaaS vendor, what is the duration for revenue recognition, and for the buyer, what is the duration for amortizing the expense? It sounds more like a mortgage than a revenue stream. From a business perspective, what is the incentive for the SaaS vendor to proactively manage the account if there is no additional revenue opportunity for years to come as the customer is essentially locked in financially with a license?

For those of us who spent some time in our career selling or marketing for on-premise enterprise application vendors, it’s déjà vu all over again.