By: Cris Wendt While there are cases where the up-sell of additional hardware capacities (more channels or throughput), or additional capabilities (more hardware functions) can be facilitated by unlocking these capacities and capabilities with license keys, it's important to understand some of the key ways software is different from hardware. These fundamental differences will enable you to think about ways of bringing new products to market. While a full discussion of these differences and issues is well beyond the space afforded in this blog, the following software licensing considerations should help you understand how the software product marketer thinks and how you, as a high-tech manufacturer, need to start thinking: Think “Right-to-Use” – Customers don't own anything when they buy software. Customers buy a right-to-use the software, based upon the terms and conditions of the software license terms or the software license agreement. Unlike buying physical goods where customers can do pretty much whatever they want with the goods, software usage is limited to terms specified in the license agreement. When thinking about creating software products, an innovative way to think of the software is, software as a service (SaaS) – a service that is performed on an ongoing basis as it is being used or consumed. So in this sense, you may ask yourself how would you price the software if it were a service – what is the service my customers want, what are the metrics of usage that I can price, and how much would I charge? Clearly Define the Terms AND Limits Of Usage Rights – These terms and limits become an important foundation in the pricing and associated revenue models so it's important to be clear about usage terms and limits when creating products and packaging. Extending the terms of a license may be offered commercially, enabling you to generate more up-sell revenue. For example, you may allow a particular software product to be used only on one physical machine. This means you price the software and define the usage limits for a software usage profile based upon usage for a single machine. If you find that customers occasionally want to move the software to another machine, to obtain more value, you can charge an additional transfer fee, or, perhaps provide a concurrent license at a higher fee. Use the Common License Model Attributes As the Key Usage Parameters To Build Your Pricing And Revenue Models License Term – this refers to whether the right-to-use is a perpetual license, or, a time-based right-to-use (subscription license). The industry trend is a movement toward time-based license models. License Metric – this refers to a unit of usage upon which you can base pricing, one that ideally scales with usage. This should match how the customer uses your product and is willing to pay for additional usage. Some common metrics are “per device”, “per user”, “per concurrent user” and “per managed capacity” (e.g. number of channels, channel bandwidth). Product Features/Package – this refers to an aggregation of technical features that form the basis of a meaningful customer product. Build Your Software Products Lines Based On Value And Markets – when building your software products (consisting of different product models with associated price points) be sure to consider the different ways that the software will be used to derive value for different types of users and/or markets. For example, it's possible to sell a virtual appliance software license for $1,000 that is licensed to be used in one physical site for small customers, whereas a price point (for example) of $2,500 can be created that allows the virtual appliance to be used in any geographic location, possibly for cloud computing applications required for large enterprises. Alternatively, a time-based or rental license can be sold that allows a customer to use a virtual appliance for a short period of time, unusually during high usage (such as a tax preparer may see). This is where a good understanding of customers and usage profiles for different markets can pay dividends when creating product lines. Add Programs and Discount Structures – with the product lines in place (and evolving over time), you can create a series of discount structures and various license programs to target different markets or channels (e.g. managed service providers, service providers, channel partners, etc.) Ultimately, you will want to trade-off simplicity and precision when making decisions in order to balance revenue opportunity with operational costs, but thinking about the fundamentals above will help you think about new ways to monetize your offerings. Next Week – Step 3: Balancing Revenue Recovery and Customer Satisfaction with Your Compliance Strategy