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

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.