Software commercial models: license vs. SaaS vs. custom software development

Remember the “good old days” of buying software? Looking back, they don’t seem that good anymore: suboptimal flexibility used to be the rule, caused both by technology limitations and rigid business models. So, the main options used to be limited to (A) licensing “packaged software”; or (B) having your own software developed through a slow, cumbersome process.

Some decades on, we see that technological breakthroughs have impacted the way software is…

  • bought (e.g., SaaS, licensing, and various hybrids),
  • delivered (e.g., mostly downloads or direct cloud access, replacing CDs and in-person installation),
  • and updated/maintained (e.g., currently in smaller batches, on a continuous basis, paid by regular fees; versus previously huge updates delivered at long intervals).

So, where are we at the end of 2021 AD, when it comes to commercial options of buying software? While software licensing has definitely evolved, the arrival of SaaS and agile custom development (plus various in-between hybrids) mean that clients have a lot more to choose from.

Software licensing

For the cases where your software needs can be served by existing software, licensing is the “legacy” commercial option. The clients would get installation kits to install on their own, or have the vendor install it on-premise; then pay either all at once or in big chunks.

With licensing, some things have evolved, while a lot of others stayed the same:

  • Licensing still refers to software that sits on the client’s premises.
  • Nowadays, its installation usually follows a direct download and/or online access of software.
  • Can be bundled with various services such as implementation, customization, training, maintenance, and technical support.
  • The licensed software’s “look-and-feel” is pretty close to that of an off-the-shelf product.
  • In some geographies, there are strict legal requirements for the software vendor to keep delivering and maintaining the licensed software even if the company goes bankrupt, is merged/acquired, or in any other way incapacitated.
  • By paying in one big installment, the client can account for the software as an investment; while regular payments make it a regular expenditure that can lower the client’s taxable base.

SaaS/Software as a Service

Still in the area of existing software that can serve your needs, SaaS is the “teenager in the neighborhood”:
  • As the name implies, it is a service that clients can only access while paying regular fees.
  • The SaaS can only be accessed through the cloud, which means the service quality is heavily influenced by the specs of the specific cloud infrastructure (i.e., availability, speed, etc.).
  • Maintenance is included by default and delivered automatically by the SaaS company through regular, small updates.
  • Depending on specific client’s SLA (/their acquired package), tech support might be paid separately or included with various degrees of access (e.g., single/multiple channels of communications, during regular working time or 24/7, etc.).
  • Custom implementation, customization, and training might also be available but usually offered as separate, possibly non-SaaS packages.
  • In some geographies, there are no legal obligations for the software provider to keep providing the service if the company is shut down or incapacitated in any way.
  • Especially for the EU-based clients, the location of SaaS service (i.e., where the user data is stored) has an impact on their GDPR/data privacy compliance.
  • Data security is included in the package and taken for granted. (“But…”)
  • Regular/recurring expenditure can help lower the client’s taxable base.

Custom software development

Custom software development has always been there, as a solution for the cases where no off-the-shelf software can solve it. Due to technology advancements (e.g., cloud, CD/CI, agile methods, etc.), it now has an innovative side added to a strong, conservative foundation:

  • Buying and budgeting moved from huge upfront payments and specifications efforts to a lighter, agile approach.
  • As a client, you pay as you go, based on the delivered packages (spaced along an agreed calendar of features).
  • An important advantage: custom software development follows your current/updated business needs (which may or may-not be the same as those from the project initiation).
  • The pricing of custom software development is more accurate, in that you will only pay what you need (as opposed to buying a fully specified license that you only partially use).
  • Delivery of software to client is fast and continuous, either on cloud or on premise.
  • Post-delivery services, such as maintenance and tech support, are usually not included. However, the client has multiple options, such as (A) taking over maintenance/support themselves, (B) retaining the support services of the original software development company, or (C) switching to a new service provider that specializes in tech support. Either of the three options will come with a substantive cost package.
  • With custom software development, dedicated focus and effort needs to pe put into data privacy and security. Although not necessarily a business-related feature, it has to be intentionally specified and budgeted.

Conclusion

The big winner of the commercial models in software development is, quite obviously, the SaaS. By making it straightforward for the clients to buy and use, it has significant traction with all types of clients, from SMBs to enterprise.

At the same time, licensing still has a lot of advantages, especially when it comes to secure, on premise software.

However, both licensing and SaaS will hit a wall if the client has software needs that can only work when custom-made: licensing model can maaaybe accommodate some customization but at very high costs, while SaaS is pretty much incompatible with deep customization.

Therefore, custom software development can be a winning solution: it is the closest to serve client’s business needs, its pricing is the most accurate (/the most connected to value), and the payments are done as you go, strictly related to deliveries.

 

Accuracy of serving clients’ needs

Accuracy pf pricing

Upfront payment possible

Pay as you go

Licensing

★★

★★

SaaS

★★

★★

Custom software development

★★★★★

★★★★★

 

Do you still need guidance on choosing your software development model/system? Get in touch, and we’ll be happy to support!

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