5 Pillars of Software Monetization

The value derived by software products should be seen in from the perspective of the value they provide to their users. Using an effective software monetization solution can bring significant productivity gains (how much time would bookkeeping take without spreadsheet software?), or provide entirely new capabilities for a business unit (high end materials engineering software could determine the lowest cost of a material that can be used for a particular project without undermining its structural integrity, for instance).

The value of software and therefore how it is monetized should be seen within the context of value chain in which it belongs to.

Let's look at the key factors in implementing a robust comprehensive strategy to optimize the business processes tasked to monetize software within their firm.

What is Software Monetization?

Software monetization refers to the process of generating revenue from software licensing, distribution, and services provided for a software product, as well as preventing and detecting software piracy, and ultimately implementing countermeasures for non-compliance. The goal for an ISV should be to maximize the software's value through a multi-tiered approach.

It's important to note that a software monetization model is not simply "software sales", but encompasses many different activities, that will vary in importance depending on the size of the organization, along with the type of software being made available.

Why should you pay attention to your software monetization strategies?

At the very least, software monetization allows a vendor to cover the costs of operations for a software business unit: There are many activities that go into the release of a successful software title, such as the costs associated with competent software developers, maintenance & updates, support, sales marketing, distribution, and other significant overhead (compliance, legal, license fees for tooling, servers etc.). Such costs are usually paid for through software monetization.

Software Monetization Strategy: 5 Pillars.

A Software monetization Strategy refers to all activities that pertain to optimizing revenue streams for a software product and is key for an organization to achieve its business objectives. It typically includes several departments within a large organization to work together and encompasses the following pillars:

1. Software Licensing & Compliance Management
2. Software Protection
3. Detection of License non-compliance & revenue recollection
4. Software Sales & Marketing
5. Professional Services: support, training, and utilization data

Relative effort and emphasis on these activities vary by business size and sector, and decisions made within the above will have a crucial impact on business success.

We like the analogy of pillars, since there usually isn't a single silver bullet to maximising revenue for a software application. Indeed, different customers will want to use your product differently which will have effects on your pricing strategy, while threats to your organization's intellectual property from crackers and non-compliant users will decrease revenue opportunities. Meanwhile putting too many guards and locks in place will affect the customer experience, making your strategy a balancing act.

Pillar 1: Software Licensing & Compliance

With the exception of open-sourced Software, licensing is often the primary component of any software monetization strategy. Simply put, software licensing is the legal framework through which end users are granted the right to use a copy of software under specific conditions set forth by the software creator or publisher. It defines the permissions, restrictions, and rights of use, ensuring that the software is used in a manner that respects the intellectual property rights of the creator.

Common commercial Software License models:

Currently, the subscription business model is the preferred approach to licensing software today, as it does not require upfront payment for a license (reducing the barriers to entry), while providing steady revenue streams for the vendor to in turn continuously improve on their product.

Other common license types that we see our customers implement include consumption-based software licensing, where they will charge for a certain number of credits or tokens; Per seat (also known as per user) licensing, node-locked licensing, and floating(concurrent use) software licensing.

It's important to note that the same software title may be licensed differently depending on the customer's use case and requirements, so having the ability to support many business models can be a powerful advantage for any software vendor.

A more in depth discussion around software license models can be found here.

Software Compliance & Software Asset Management Tools

Having the means to properly monitor and implement software usage tracking is important for both the software vendor as well as the customer. Onus usually falls on the software publisher to establish non-compliance, and often relies on internal tracking and monitoring systems as well as audit rights in order to monitor and ensure compliance with license agreements.

The end user (customer) may opt to implement its own Software Asset Management (SAM) primarily to keep track and to optimize the usage of the licenses obtained, but also to contest any claims of misuse.

Data from SAMs and internal monitoring tools can also come in handy during new contract negotiations.

Pillar 2: Software IP Protection

It is estimated in 2023 that a staggering amount, 37% of global software is non-compliant use. Any serious software monetization strategy must include careful consideration around preventing non-compliant usage of software, along with anti-piracy initiatives.

Unfortunately, much to the dismay of vendors, it can be useful to note that all software can be cracked and counterfeit by motivated groups. Addressing this reality requires a multi-pronged approach. Being able to reduce piracy by a small amount or increase collection from non-compliant customers often represents millions of dollars for large organizations.

Approaches used in Software Protection

There are many tools and services available to make the lives of pirates more difficult.

• Implementing a Licensing & IP protection module deeply embedded within your software that only decrypts useful parts of the binary upon successful license validation would a good start.
• Cryptographic Signatures: Each installation or update could require a cryptographic signature that is verified against a public key held by the software. This ensures that the software has not been tampered with and that updates or modules are legitimately sourced.
• Software Tamper Detection: Incorporating mechanisms that detect and respond to unauthorized modifications of the software code. tamper detection can also be done via Code Signing key modules that break functionality if tampered with.
• Runtime Protection: Implementing tools and techniques that monitor and protect the software from attacks while it is running
• Embedding a hidden marker or code in the software that can be used to trace piracy or unauthorized distribution, this is called Digital Watermarking
• Transforming the software code into a version that is difficult for humans to understand or reverse-engineer through Code Obfuscation, while still being fully functional.
• Watermarking:

Pillar 3: License non-compliance Detection & Revenue recollection

You can still plan for a scenario by which most or all protection modules have been circumvented. Stealthy detection mechanisms that can phone home can help companies gain insights on how non-compliant software is being used and what outcomes to expect. For example, an engineering student uses a cracked version of expensive CAD software for learning purposes will probably not as interesting of a case to pursue as an organization that is using the unlicensed copy to develop spare parts for a Boeing Jet.

Tactics employed in detecting non compliance may include the following:

• Cryptographic Signatures: Each installation or update could require a cryptographic signature that is verified against a public key held by the software. This ensures that the software has not been tampered with and that updates or modules are legitimately sourced.
• Anomaly Detection: Advanced anomaly detection algorithms can analyze usage patterns to identify behaviors that deviate significantly from the norm, which might indicate shared licenses or pirated copies.
• Social Engineering Traps: Deliberately include functions or hidden features in the software that, when accessed, signal a likely unauthorized use. For instance, features that a regular user would never use, but a pirate examining the software might trigger.
• Software Updates: During the update process, the software can check for the legitimacy of the license before allowing the update to proceed. This not only ensures that pirated copies stay out of date but also provides an opportunity to re-validate licenses.
• Feature Access: For software that includes modular features or services that can be turned on or off based on the user's subscription, a phone home check can validate the user's entitlement to these features.
• Error Reporting: When the software encounters an error or crash, it can send a report back to the developer. This report can include license information for validation, and can also help in identifying if the crash was due to tampering or unauthorized modifications.
• Telemetry: With user consent, collecting telemetry data on how the software is used can be invaluable for improving the product. This can also include checks to ensure that the software usage complies with licensing terms.

Counter measures

There are a few general steps to take in order to recover lost revenue:

Actional Usage Data must be collected (often at the device and networking level), which would be presentable as evidence. Being able to accurately identify who is infringing can be a big challenge.

The ability to send Cease & Desist notices to the right recipients with offers to offenders to become compliant.

Using legal frameworks to file claims in courts.

Pillar 4: Software Sales, Marketing, Distribution

Another key aspect of software monetization will be the sales, marketing, and distribution of software. Reaching the right customers, at the right place, at the right time often requires a combined effort among these 3 activities.

Software Sales:

Software sales refer to the process of selling software products to customers. This can involve direct sales, where a company sells software directly to consumers or businesses, or indirect sales, where third parties like distributors, resellers, or retailers sell the software.

The sales process for software often includes identifying potential customers (leads), engaging with them to understand their needs, demonstrating how the software meets those needs, negotiating contracts, and finally closing the sale. Software sales can be for standalone products, subscription business model, or software-as-a-service (SaaS) models.

Most software monetization solutions will provide solutions for "direct sales", meaning automations and integrations to E-commerce. The most robust software monetization tools will also include integrations with CRM, ERP, and might even have marketplace, reseller, and distributor portals available.

Software Marketing:

The goal of software marketing is to generate interest in the product, build brand awareness, and ultimately drive sales. Software marketing encompasses the strategies and tactics used to promote and sell software products.

In today's world, marketing strategies usually include digital marketing (SEO, content marketing such as this blog post, social media marketing, email marketing, paid advertising), traditional advertising, public relations, and participation in trade shows and conferences.

Having the ability to measure effectiveness of marketing campaigns is critical in order for business models used by software publishers to success. Tracking is often done through analytics tools (Like GA-4), or directly within a CRM, but software monetization solutions like ours will allow publishers to collect campaign info within their platforms and potentially correlate that data with software usage data. This in turn can allow software companies to create a feedback loop, making their product better and their marketing efforts more relevant as a result, ultimately improving customer satisfaction.

Software Distribution

At a high level, software distribution is the process of delivering software and it's subsequent updates to the end user.

Today, most software is delivered over the internet, either on a website, or download site. Software distribution is crucial for ensuring that software is accessible, easy to install, and updatable by the user. It also involves managing licenses and ensuring compliance with software usage policies.

Key decisions have to be made around how an evaluation copy of a software can be obtained (whether or not a, NDA must be signed, whether evaluations are paid for etc.), whether a software can be copied, where it can be deployed (sites, regions), who can have access to use the software.

Many of these decisions might follow expectations around industry standards, and will ultimately have a significant impact on software monetization outcomes.

Pillar 5: Professional Services

Depending on the business model, professional services might be a significant piece of you software monetization playbook.

At LicenseSpring, we work with companies that run the full gamut, where they might depend exclusively on license fees for revenue (these tend to be commercial, self-serve products), to open-source software (where the license fees represent very limited revenue potential, where the margins are mostly made in professional services), to companies somewhere in the middle.

Usually, some level of support, training, and customization can be included for most customers, with premium tiers available for more demanding customers, enabling entirely new business models for traditional software vendors.

Customer Support

Most software these days will come with some form of tutorials, guides, maintain a forum and other documentation.

Free support can usually provided with the above assets, along with a "best efforts" ticketing and maybe even a phone system.

Premium Service Level agreements are often negotiated between a software vendor and a customer with guaranteed response times, and can often be lucrative for the vendor, while acting as insurance and piece of mind for the buyer.

Training & Workshops

When selling enterprise software, it's almost always the case that it will be used by many people in varying roles within the organization.

Whether it's the team deploying the software, the people using the software, to the people approving the license bills, there will be varying levels of training information that needs to be made available. Self Serve models can leverage videos, online tutorials, guides and documentation.

Making available trainings, or scheduling webinars and workshops are also a significant part of any successful relationship between vendor and customer, and should therefore be viewed as part of a vendor's software monetization activities.

Software Customization

Depending on the software and the category it is in, it may be suitable to customize the software for a given customer.

At LicenseSpring, for example, often comes across edge cases that a single customer encountered that none of its thousands of other customers face, but would be critical for that single customer. In this case, we see customizing software as one of our new business models. We typically add new "feature requests" for self-serve customers, which will be prioritized according to importance (usually based on prevalence of the need), and for larger customers, a certain level of custom features can be built, depending on the contract size.

Customizing software for a single customer can also be a trap however. If there are no long term plans or budget to maintain or expand custom software development, it may not make economic sense for the vendor or the intended user (see our Delphi SDK).

Data Utilization

Usage data is another auxiliary potential revenue stream outside of licensing fees that should be considered as part of a holistic software monetization strategy. There are many situations where Data generated by a customer through the use of a given software is also valuable to them.

At Licensespring, we store license usage info of our customers' customers which falls beyond the scope of a normal license manager, but provides valuable insights into their business lines.

Special Case: Open-Source Software Monetization

Open Source Software is special case when it comes to software monetization. Just because a software is open source does not mean that it is not monetized. We often see companies that provide an open-source version of their software, and create a separate commercial license which will include consulting and professional services.

Paid consulting services, SLAs, and professional services typically become a larger share of the revenue generated by these companies.

Where Does LicenseSpring Fit?

We started off with the goal of becoming the world's best license manager. Ultimately that means we need to strive at all times to the best software monetization tools on the market, so that our customers within the global software industry can use our platform in a way that makes sense for their business.

We support all software business models, offer software protection and piracy detection tools, and tie into most sales and marketing workflows that make us a top choice for companies looking for a software monetization solution.

Please contact us if you are a software developer, product manager, or executive looking to monetize your software.

Final thoughts:

Software monetization, piracy detection, and software protection will never be fully solved problems and will constantly evolve.

Please don't make the lives of your legitimate users difficult to optimize revenue streams or to catch illegitimate users (all too common in enterprise software)

Focus on product quality for services in demand, and revenue will naturally follow.