As discussed in an earlier article, “Acquiring and Deploying Accounting Software,” getting new accounting software has become more complicated. In this post, let’s examine the direct cost of the software compared with the cost of buying a traditional perpetual license plus annual maintenance and support vs. acquiring use of the software on a subscription basis with a set monthly fee. This comparison assumes that the other costs associated with implementing and supporting the software do not vary substantially between the two alternatives. For example, hosting and other IT costs would be the same, as would the cost of professional services for implementation.
To better illustrate, let’s use an actual example of a document we prepare for prospective MIP Fund Accounting software clients early in the sales process to communicate the likely cost of the software that they can use for planning and budgeting purposes. Click here to access the Excel template that we use. Note that the top part of the worksheet includes the standard 3-user configuration and the core modules. Other modules are listed below and optional and can be cut and pasted to the top section. The one-time license costs are listed in the first dollar column and the monthly subscription (think rental) cost for the same configuration is listed in the second dollar column. Also, notice that the subscription price for the core modules is bundled. This is how Abila prices its product, not necessarily how other software vendors do it.
So. the essential questions are what is the total comparative costs over time of purchasing vs. subscribing and at what point does it become for favorable to have purchased the software license. Generally, software vendors that offer subscription pricing try to recover their costs and profits over a 4–5 year period. The relevant costs over 5 years from the Abila example are summarized below:
As the summary portrays, the relative costs over five years is roughly equivalent but after that, the subscription pricing alternative will add to the cumulative cost, an increase of $2,833 per year in this example (annual subscription fees of $5,364 less annual maintenance and support of $2,531). Other factors enter into the decision such as anticipated length of time the software will be used and cash position at the time of acquisition. Also, bear in mind that the traditional purchase model in all likelihood will be going away at some point as software manufacturers fully adopt the full web-based, software as a service model. Anticipate more discussion on this topic in subsequent articles.