What is a perpetual license? How they work with pros + cons

When you buy software, you usually have two choices: pay once and keep it, or pay monthly to use it. This guide explains perpetual licenses and the pay-once option, and helps you decide if it's right for your business.

What is perpetual licensing?

A perpetual license is a contract that gives you permanent rights to use software after paying once. You can use that specific version forever, so there's no expiration date. You don't own the software itself. The publisher keeps ownership of the code. 

However, your right to use it doesn't expire.

This perpetual license definition differs from subscriptions, where you pay to keep access. 

Perpetual licensing was the standard before subscription models became popular. Companies paid once to license software for ongoing use. Even then, buyers received usage rights under a license agreement, not full ownership of the software code.

Many vendors offer both perpetual and subscription options to meet different customer needs.

Key features of a perpetual license

A perpetual version includes these core features: 

• One-time payment: You pay once for the perpetual license for software and never pay again.
• No expiration: The permanent license doesn't expire or need renewal.
• Version-locked updates: You get the perpetual version you bought. Major upgrades cost extra. 
• Offline access: Most perpetual licenses work without an internet connection.
• Permanent usage rights: You hold the right to use that version for as long as you want.
• No recurring fees: The perpetual model has no monthly or annual license costs after sale. 

Here are some examples of perpetual software licensing:

1. Microsoft Office 2021. A good example of a perpetual software license is Microsoft Office 2021. If you buy it under a perpetual license, you can use that version forever.
2. Adobe Photoshop CS6. Adobe sold CS6 as a perpetual software license before switching to subscriptions. Users paid once and kept that perpetual version forever.
3. AutoCAD 2016. If a firm purchased AutoCAD 2016 under a perpetual license, it could use it without paying again. Autodesk stopped selling perpetual licenses after 2016. To access newer versions like AutoCAD 2020, customers must now use a subscription plan.

How do perpetual licenses work?

Here’s how a perpetual license generally works.

1. You make a one-time purchase

You pay a single fee to own the license. This differs from paying monthly for access. Microsoft Office 2019 is a perpetual license example. You buy it once instead of subscribing to Microsoft 365.

2. You get a specific version

The perpetual license applies to one software version. You can use Photoshop CS6 forever, but you won't get updates to newer versions. 

3. Support costs extra after year one

Most vendors include one year of support with your perpetual software license. After that, you pay for:

• Technical support from the vendor.
• Security patches and bug fixes.
• Major version upgrades, which means buying a new permanent license.

4. Your software keeps working

The perpetual version stays active even if the vendor stops selling it. However, this isn't always guaranteed. Some software needs to connect to activation servers to verify your license. 

If the vendor shuts down those servers or changes how activation works, you may not be able to reinstall or reactivate the software. 

For example, Adobe discontinued Creative Suite perpetual licenses, and while many still work, some older versions have faced activation issues over time. 

5. You may transfer the license

Some permanent licenses let you move to a new computer or transfer to another user. Enterprise perpetual licenses often cover many machines. 

6. Industries prefer stability

Engineering firms and companies with legacy systems often choose the perpetual model. They avoid frequent updates and maintain consistent workflows.

Note: Perpetual licenses are key when developing your company's pricing and packaging strategies. It informs decisions about software monetization. It can be a component of a hybrid pricing approach.

Perpetual license vs. Subscription: Key differences 

The main perpetual versus subscription difference is ownership. Perpetual licenses give you permanent rights after one payment. Subscriptions need recurring payments to maintain access. These models differ in several ways.

Payment structure

• The meaning of perpetual licenses is that you have large upfront payments but no recurring costs.
• Subscriptions mean you have lower initial costs but ongoing monthly or annual license fees.

Updates and versions

• Perpetual licenses tend to lock you to one perpetual version and upgrades cost extra.
• Subscriptions include updates and many new features while active. However, some major features may cost extra as paid add-ons. For example, Microsoft 365 Copilot requires a separate purchase on top of a Microsoft 365 subscription.

Support and maintenance

• Perpetual licenses can include one year of support, then charge for extended help.
• Subscriptions may provide ongoing support throughout your subscription period.

Accounting treatment

• Perpetual licenses often become capital expenditures (CapEx), but this depends on the specific arrangement and accounting rules.
• Subscriptions often become operational expenditures (OpEx), especially for cloud-based services. However, some on-premise subscription licenses may be capitalized as assets under US GAAP or IFRS rules.
• Note: Always check with your finance team. The right accounting treatment depends on your specific situation.

Feature access

• Perpetual licenses give you stable features that don't change.
• Subscriptions provide continuous access to new features and improvements.

Deployment options

• Perpetual licenses often tie to specific devices or servers.
• Subscriptions offer cloud access and multi-device flexibility.

Long-term costs

• Perpetual licenses can become obsolete without maintenance plans.
• Subscriptions accumulate costs that can exceed perpetual license prices over time.

Comparison table: Perpetual license vs. Annual subscription comparison

Pros and cons of perpetual software licenses

Perpetual licenses offer long-term savings for customers who use software. But vendors miss out on recurring revenue streams. Here are some pros and cons of perpetual software licenses.

Pros

1. Immediate revenue: Vendors receive large upfront payments for financial stability.
2. Upsell potential: You can sell maintenance contracts and version upgrades later.
3. Market differentiation: Some customers prefer permanent licenses over subscriptions.
4. Customer savings: Long-term users save money with perpetual licensing.
5. Ownership appeal: Customers value owning their perpetual version outright.

Cons

1. No recurring income: Vendors lose predictable monthly revenue from subscriptions.
2. Limited customer contact: One-time sales reduce ongoing engagement opportunities.
3. Less usage data: Vendors collect less information about how customers use the software. This makes it harder to improve the product or offer helpful support.
4. High entry barriers: Large upfront costs deter budget-conscious buyers.
5. Outdated versions: Customers without maintenance miss critical security updates.

Perpetual license vs. Annual subscription: What’s the difference?

Perpetual licenses and annual subscriptions serve different needs. Here's what sets them apart.

Ownership model

A perpetual license gives you permanent rights to use that software version. You keep those rights forever after one payment. It's like buying a lifetime membership. You don't own the gym, but you can use it whenever you want.

An annual license gives you access for exactly one year. You must renew to continue using the software, like leasing that same car. 

Cost structure

Perpetual licenses demand higher upfront investment but cut recurring fees. A $2,000 perpetual license beats paying $50 monthly if you use it over five years. Annual subscriptions spread costs over time. You pay less at first but more long-term through perpetual royalty-like recurring payments. 

Accounting impact

• Perpetual licenses are often part of capital expenses (long-term assets).
• Annual subscriptions are often part of operating expenses (yearly costs).

The exact treatment depends on the license terms and accounting standards. Check with your finance team for your specific situation.

Support differences

Perpetual software licenses include limited support, often for the first year. Annual subscriptions bundle full support while active.

Update access

The perpetual version you buy stays frozen in time. Annual subscribers get regular updates and access to many new features. However, some premium features may require an extra purchase, even for subscribers.

When to choose perpetual licenses vs. Annual subscription

Choose perpetual licenses when:

• You need long-term software control.
• Your workflows need version stability.
• You want to cut ongoing costs.

Choose annual subscriptions when:

• You need the latest features.
• You prefer spreading costs over time.
• You value flexibility and cloud access.

Many companies now offer hybrid models. These combine perpetual licenses with subscription add-ons for the best of both approaches. 

Note: Learn more about different subscription-based business models to understand all your options.

How to price a perpetual software license

You price perpetual licenses by balancing development costs, market position, and competitor pricing. Add maintenance fees to create ongoing value.

Key pricing factors

• Development investment: Higher development costs justify higher perpetual license prices. Complex software commands premium pricing.
• Market positioning: Premium products support higher permanent license fees. Budget options need competitive perpetual model pricing.
• Competitor analysis: Research similar perpetual software license prices. Stay competitive while differentiating your offer.

Pricing components

• Base perpetual license fee: Set prices high enough to profit but low enough to attract buyers. Cover your costs while remaining accessible.
• Maintenance: Charge 15% to 25% of the perpetual license cost yearly for support and updates. This creates recurring revenue.
• Version upgrade pricing: Offer discounted upgrades to existing perpetual license holders. New versions can cost 40% to 60% of the full price.

Note: Explore various enterprise software pricing models to improve your perpetual licensing strategy. 

Managing revenue and billing for perpetual licenses

The primary revenue from a perpetual license is recognized at the time of the sale. This contrasts with the recurring revenue of subscription models. Initial revenue can be large, but it can lead to revenue changes if new license sales are irregular.

Complexities of ongoing revenue streams

Ongoing revenue with perpetual licenses can come from maintenance contracts. It can also come from support agreements and the sale of upgrades. Managing these separate revenue streams can add complexities to billing and revenue tracking. 

How to transition from perpetual to subscription licenses

Here are seven key steps to consider when transitioning your pricing model:

• Communicate: Tell existing customers about changes early. Explain subscription benefits.
• Grandfather current users: Let perpetual license holders keep their version. Offer special migration incentives.
• Analyze revenue impact: Calculate short and long-term revenue effects. Initial subscription revenue may dip before growing.
• Train your sales team: Teach them to sell subscription value. Update all marketing materials.
• Invest in retention: Subscription success depends on keeping customers. Build strong customer success programs.
• Iterate based on feedback: Watch the transition. Adjust your approach as needed.

8 best practices for software monetization with perpetual licenses

Here are some best practices for software monetization with perpetual licenses:

1. Define clear license terms. Your end-user license agreement (EULA) must specify usage rights and restrictions.
2. Create add-on revenue. Sell support contracts, training services, and maintenance agreements beyond the base permanent license.
3. Offer valuable integrations. Charge for premium integrations and add-on features to increase perpetual license value.
4. Combine pricing models. Mix perpetual licenses with usage-based fees for cloud features or API calls.
5. Design upgrade paths. Price new versions at 40% to 60% off for existing perpetual license customers.
6. Automate revenue tracking. Use modern billing systems to manage perpetual license sales and recurring maintenance revenue.
7. Nurture customer relationships. Keep perpetual license holders engaged with newsletters and upgrade offers.
8. Protect your software. Use license keys and activation systems to ensure perpetual license compliance.

Note: Discover proven SaaS monetization strategies in our blog post on the topic. You can also read our guide to software license management.

Update your perpetual software licensing with Orb

With perpetual software licenses, opportunities exist for dynamic pricing and evolving service offerings. Orb provides the agility and precision needed to manage these aspects. Here’s how Orb can help you improve your approach to perpetual licenses and beyond:

• Define new pricing without engineering. Business teams can launch maintenance tiers and support packages. Run Orb Simulations on historical data to preview revenue outcomes before deploying changes.
• Bill hybrid models. Orb ingests raw usage events so you can define your own billable metrics. With Orb RevGraph, usage data is decoupled from pricing logic. As a result, invoices remain accurate even as you evolve pricing.
• Unify revenue operations: Orb's scalable API ingests vast amounts of event data. Track perpetual license sales, maintenance renewals, and usage-based features. Use built-in analytics that give finance and product teams a single source of truth.
• Get dedicated implementation support. Our team helps you deploy billing infrastructure for complex pricing models. We share proven strategies for combining perpetual licenses with modern monetization approaches.
• Make data-driven decisions. Orb enables forecasting through granular visibility into usage and revenue. Finance and product teams can make better decisions about pricing and value expansion.

Ready to bring precision to how you manage and grow revenue with perpetual licenses? Explore our flexible pricing options. Discover how Orb can be the foundation for your evolving monetization strategy.