• Eugene Cho

IBM Inflicts Price Increases for On-Prem Perpetual Licensing

Updated: Feb 23

Effective July 1st, IBM no longer offers entitled discounts on a significant number of on-premise perpetual software licenses. Entitled discounts relate to the adjusted list price that a customer receives based on deal volume. These discounts lowered IBM’s manufacturer’s suggested retail price (MSRP) by 10-20%, meaning that customers can now expect a 10-20% increase in price for their on-prem perpetual licensing.

IBM has a habit of inflicting 3-5% increases on MSRPs each year, but this is the first major sign of its move to an all-subscription licensing model. Removing the entitled discounts makes investing in perpetual licenses less financially attractive compared to the SaaS or subscription license equivalent.

Why is IBM doing this now? We believe it hints at IBM’s financial expectations and go-forward strategy. Historically, the vendor used a “front-loading” deal strategy to capture as much revenue as possible at the beginning of an engagement to boost earnings in the current fiscal year. This technique was intended to help blunt IBM’s trending year-over-year revenue losses and shore up the slipping stock price.

However, due to the COVID-19 pandemic, many Wall Street analysts are predicting lackluster financial numbers from just about all public companies. IBM suddenly finds itself with a legitimate excuse for poor financial performance this year. Now is the perfect time for the vendor to move away from their “front-loading” strategy and push subscription pricing models on customers. Though subscription and SaaS pricing models do not provide the up-front revenue benefits of perpetual licenses, they do deliver massive long-term value for suppliers.

Besides generating more money over the long term, subscriptions also significantly increase vendor stickiness with customers. ClearEdge has examined thousands of SaaS and subscriptions deals to assess buyer leverage, and on average, it is much harder to switch off a subscription-based product than a perpetual one, due to the license rights you are forced to give up in a term/subscription-based model.

In SaaS and subscription models, you lose access to the solution if you stop paying for it. In a perpetual equivalent, you own the solution and can technically use it in perpetuity, even if you do not renew the maintenance agreement. SaaS and subscription models almost guarantee supplier incumbency at renewal time, since it’s unlikely that an organization can realistically “turn off” all licensing, or switch to a competitor without years of preparation. This means the vendor can boost renewal costs at will (7%+ at the very least) and require minimum volume commitments to prevent a customer’s annual run rate from decreasing.

If the COVID pandemic has taught us anything, it’s that we need deals that provide more flexibility, not less. But IBM and many others are pushing customers to adopt the restrictive subscription model, which effectively hamstrings the customer. Since you will likely experience this type of price increase and sales rep activity from IBM, it’s important to understand the myriad risks associated with SaaS or term/subscription-based licensing before you sign on the dotted line.

Eugene Cho is a Senior Analyst at ClearEdge Partners.

For more information on the risks associated with SaaS deals, view our SaaS Buying Trends webinar, read our SaaS Buying Traps and Trends blog, or download our Top Gotchas in a SaaS Agreement whitepaper.