From Selling to Subscription Model in the Enterprise Software Market: A Paradigm Shift?

The current study examines the driving forces behind enterprise software providers' adoption of the subscription-based pricing model. I identify and model two special features of enterprise software products: consumers’ uncertainty about their true valuations for the product prior to adoption and the high upfront implementation cost. I develop a dynamic model with an infinitely-living monopoly software vendor and overlapping generations of consumers. The results show that in a steady state, when consumers know their true valuations, the three licensing formats, pure selling, pure leasing (subscription-based) and concurrent selling and leasing, are equally profitable. When uncertainty exists, however, any one of the three licensing formats could be optimal depending on the magnitude of the implementation cost, demand distribution and the accuracy of the signal. The results offer interesting insights into the emerging adoption of the subscription-based pricing strategy. Future directions are discussed at the end.