An agent-based model to study the market dynamics of perpetual and subscription licensing

Abstract

This paper examines the market dynamics between two competing pricing strategies through an agent-based simulation model. Specifically, this study is inspired by the rising popularity of the subscription licensing strategy in software industry, which offers many advantages over the traditional fixed-fee perpetual licensing strategy. However, it remains unclear under what conditions a firm implementing the subscription licensing strategy will win the market over its competitors practising the fixed-fee perpetual licensing strategy. Using an agent-based model, we simulate two types of firms that are developing and selling two similar products or services to a fixed number of heterogeneous customers with the aforementioned two different pricing strategies. An individual customer chooses a product or service based on his or her own preference as well as the product’s price and performance. Firms spend a percentage of the accumulated revenue on research and development to improve the product or service’s performance. Simulation results suggest that there is a narrow window for the subscription licensing strategy to beat the traditional perpetual licensing strategy, especially when a large customer base is already established with the perpetual licensing strategy.

Keywords:

• pricing strategy
• perpetual licensing
• subscription licensing
• network effects
• agent-based simulation

Acknowledgements

The authors thank the reviewers for providing careful reviews and valuable comments. This research has been supported by the Natural Science Foundation of China, Grant Nos. 71001050, 71072038, 71272108.