The Impact of Customer Valuation Uncertainty on Software Licensing
Authors: Xin, Mingdi
Journal: MIS Quarterly (2020)
<jats:p>This paper studies how an important feature of software adoption impacts a software vendor’s preference between perpetual and subscription-based licensing: Customers are uncertain about their valuation of the software prior to adoption. We show that customer valuation uncertainty causes the equilibrium outcome to depart from that of standard durable-goods theories in two aspects: (1) Contrary to the conventional wisdom of durable-goods theories that subscription-based licensing is optimal, perpetual licensing can be more profitable for the vendor than subscription-based licensing under some conditions. This result offers a possible explanation for the historical prevalence of perpetual licensing in many software markets. (2) When subscription-based licensing is optimal, our theory suggests a low-then-high variable pricing path. In contrast, standard durable-goods theories suggest charging the monopoly leasing price in each period. Such a variable pricing path and the resulting adoption pattern are consistent with market observations (e.g., pricing strategy by Adobe Systems). We also examine a variation of subscription-based licensing in which the vendor offers a menu of su…