Should you buy software as a service or perpetual user license? Which is best, user or usage-based pricing? Questions like these are foremost in the minds of technology leaders at any small or mid-size business planning to upgrade software or purchase a new commercial application.

Software as a service (SaaS) is a model of delivery under which the software maker also provides technical operation, support and maintenance to the client. Many growing companies got their first tastes of buying SaaS when they opted for a customer relationship management or sales force automation solution from an on-demand vendor such as or RightNow Technologies.

But the model is still something of an unknown quantity, even as SaaS options expand to include products ranging from project portfolio management to business intelligence software.

Service licensing versus buying

The service model for software provides many advantages to small businesses, the chief one being its lower buy-in costs. With SaaS, rather than paying $100,000 or $200,000 upfront for a license, plus the associated costs for infrastructure, professional services and maintenance, companies typically pay for the use of the software on a monthly, per-user basis. For the fee, which you pay as long as you use the service, the service provider bears the support, training, infrastructure, and security costs, as well as handles upgrades.

SaaS makes sense for companies with around 1,000 employees or less, says Ray Wang, principal analyst with Forrester Research, of Cambridge, Mass.  'It has better ROI and a lower cost structure,' he says. Because smaller businesses are less likely to have as many applications to connect to as large enterprises, they can derive even greater value from an SaaS solution than organizations that have to factor those integration costs into their planning.

Choosing to license software as a service provides another benefit: It eliminates the risks that come with buying software as a product under a traditional perpetual license. 'If enterprises can reduce their risk, they're interested in that, and it's why software as a service is so appealing,' says Brian Vile, vice president of solution marketing at Macrovision, a Santa Clara, Calif. based digital rights management and software licensing technologies vendor. Instead of spending a lot of money on on-premise solution to see if it works, they can get two people to try SugarCRM or Salesforce. 'That's not something you can do with software as a product,' he says.

More vendors now offering services

Macrovision was one of the sponsors of the recent study, Key Trends in Software Pricing and Licensing, which reveals that fewer vendors this year than last are offering more flexible pricing or licensing policies. Some big-name vendors of traditional commercial applications, such as SAP and Oracle, now offer subscription-based software as a service in addition to their traditional licensing models. But by and large, Vile says it's difficult for big software vendors, who are accustomed to the perpetual software revenue recognition model, to make the move. Still, nearly half the independent software vendors surveyed predict subscription-based models to be their primary offering within two years.

Software as a service isn't always the right choice. For businesses in certain sectors, such as health care or other industries that require the highest levels of data security, buying a perpetual license for a conventional on-premise solution is wise. The recent study found that the majority of enterprises surveyed prefer concurrent-user model pricing, in which you are basing the license on having a certain number of users use the product simultaneously.

Companies that opt for on-site software licenses should also ensure that they're complying with vendor license agreements. In the survey, nearly 30 percent of users identified reducing software costs as an important consideration for tracking software licenses. There's a problem, though: While most organizations can tell how much software they have installed, the manual methods they use to track licenses means they don't always have as good a handle on what pieces of it are actually being used.

Companies that automate the process of centrally tacking and managing licenses gain deeper insight that lets them be smarter about purchasing decisions at upgrade time.

Small and mid-size businesses won't get the volume-sized deals or license discounts their larger competitors do, Wang notes. But that doesn't mean smaller businesses are on the losing end when it comes to making software license deals. With the Global 2000 market being fairly well saturated, vendors are eager to move down market with solutions and pricing that makes sense for smaller companies, he says. The software as a service trend is adding to the options, as well as to the spirit of competition. 'The market for [small businesses] is extremely competitive right now,' says Wang. In fact, he adds, 'this is probably one of the best times to be a [small business] customer.'