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Using software leases to increase Software as a Service (SaaS) license sales

April 24, 2010

 

If you offer a software as a service solution, a clever way to encourage more sales is to offer a monthly pricing model where the customer pays for their use of the software on a monthly basis. You are probably already doing this, and if not, then you need to investigate it as your customers online are probably expecting it.

 

The downside for you as the vendor is that it takes a year to collect what would normally be an annual license fee.  The other downside is that you don’t get the benefit of the annual license in the form of cash flow upfront — instead you get monthly contributions.

 

A clever way to offer the customer the ability to make monthly payments and for you to get the whole amount upfront is to use software leasing.  With this approach, a leasing provider leases the software to the end customer (provided the end customer meets the credit criteria) for a period or 2 or more years, and the vendor (you) receive the license amount upfront from the leasing provider.

 

The benefits are clear:

 

· Customer gets to pay monthly

· Your pricing model which offers monthly repayments encourages more sales (so greater revenue)

· You get the full annual license upfront (from the leasing provider)

· You get the cash flow benefit of the license fee in the bank at the start of the license period

· You get revenue recognition upfront, rather than the 12 month gradual recovery

 

From a valuation perspective, the added advantage is that you are able to bring forward revenue recognition by at least a year if not 2 or more years when you employ software leasing. Why?  When you are offering a monthly pricing model you are obviously only collecting monthly license fees/ subscriptions from your customers and so you are only able to recognise what your collect each month in the form of revenue — so it takes a year to recognise a years worth of license sales.  With the software leasing approach, you get the full license amount for the period upfront, and so you get to recognise that revenue when the sale is made.

 

Interested to know more? Contact AC&E to see if we your software as a service is eligible and if we are able to help in your specific situation as a vendor — send us a message by clicking here.

 

 

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