SAP Perpetual vs. Subscription Licensing
Introduction: SAP software can be licensed in two fundamental ways: purchasing a perpetual license (with annual maintenance) or signing up for a subscription.
Each approach has different cost structures, budgeting impacts, and long-term use implications. Understanding these differences is crucial for SAP licensing and procurement professionals to make informed decisions.
Perpetual Licensing (Buy and Own)
A perpetual license involves a one-time fee to own the software indefinitely, usually supplemented by an annual maintenance fee (~20% of the license price) for support and updates.
The company hosts the software on its infrastructure and fully controls the system. Perpetual licensing is akin to buying a car: after the upfront payment, you can use the software as long as needed, even if you stop paying maintenance (though without support or new patches).
Example: SAP’s legacy ERP, SAP ECC, was sold via perpetual licenses. Customers paid upfront for ECC and then yearly support fees. The software could still be used in its last available version, even if support were discontinued.
Subscription Licensing (Pay-as-You-Go)
A subscription license requires recurring payments (monthly or annual) to use the software. The fee typically includes software usage rights, maintenance/support, and often cloud infrastructure and hosting costs.
In other words, the vendor provides the software and runs and updates it for you (e.g., in an SAP cloud). This is like leasing a car: you pay as you use it, and if you stop subscribing, your access to the software ends.
Subscription licensing shifts expenses to an operational expense model (OpEx) with a lower upfront cost. SAP takes on much of the IT workload (deploying servers, applying updates), so customers always run the latest version without major upgrade projects.
Example: SAP S/4HANA Cloud is offered only via subscription. Companies pay an annual fee per user (or capacity) and get S/4HANA as a service in SAP’s cloud.
Similarly, RISE with SAP bundles S/4HANA in a subscription package (with cloud infrastructure and services). If the subscription term ends and isn’t renewed, the software access is removed, unlike a perpetual license, which allows you to continue running the system locally.
Cost Implications and Budgeting
- Upfront vs. Ongoing Costs: Perpetual licenses require a large one-time payment (CapEx) plus smaller recurring maintenance fees. Subscriptions have minimal upfront cost but ongoing fees that can exceed the perpetual model over time.
- Long-Term Total Cost: Perpetual software can be cheaper over a multi-year period if you use the software for many years since you pay once and then only for maintenance. However, a subscription avoids a large sunk cost if you plan to replace or upgrade software in the short term. It’s important to compare 5–10 year TCO: a subscription may seem cheaper early on, but it could cost more in the long run.
- Financial Accounting: Perpetual purchases are capital assets, while subscription fees are operating expenses. Some organizations prefer the predictability of a fixed annual subscription in the IT budget, while others favor owning software as an asset.
Ownership and Control
With perpetual licensing, the company owns the software rights and usually runs the system on-premises. This provides greater control: you decide when to upgrade, how to customize, and how long to keep using the software. The trade-off is the responsibility for managing infrastructure and performing upgrades.
With a subscription (especially cloud SaaS), SAP or the provider controls the environment. They automatically apply updates and manage the infrastructure.
This reduces your maintenance burden but also means less control over the timing of changes. If a subscription lapses, you lose the right to use the software, creating a dependency on the vendor’s service continuity.
Pros and Cons
Perpetual License – Pros:
- Indefinite Use: Permanent rights to run the software you purchased.
- Complete Control: You manage and customize the system on your terms and schedule upgrades when it suits the business.
- Long-Term Economy: May provide lower total cost over a long lifecycle (no continual subscription premiums after initial purchase).
Perpetual License – Cons:
- High Upfront Cost: Significant initial investment and infrastructure setup.
- Maintenance Burden: You pay annual maintenance and need in-house IT resources to keep the system running and updated.
- Potential Shelfware: If needs change, licenses you bought can become unused sunk costs.
Subscription License – Pros:
- Low Entry Barrier: Minimal upfront cost; easier budgeting with pay-as-you-go.
- Includes Maintenance: SAP includes updates and support (for cloud services and hosting), reducing your internal workload.
- Scalable: Can adjust licenses as needs grow (often at renewal) and get new features without large upgrade projects.
Subscription License – Cons:
- Ongoing Expense: Continuous payments with no asset ownership; over many years, this can total more than a one-time purchase.
- Vendor Dependence: Reliance on SAP to provide uptime and improvements; if you stop paying, you lose access.
- Contract Commitment: Typically locked in for a term (e.g,. 3+ years); switching vendors or models requires planning once the contract ends.
Read SAP Consumption-Based Licensing.
When Each Makes Sense: Perpetual licensing is best for organizations with stable, long-term needs and the desire to fully control their SAP environment (common in on-premises scenarios or highly regulated settings).
Subscription models suit organizations that prioritize agility, rapid deployment, and offloading infrastructure to SAP, for example, those adopting a cloud-first strategy or with limited IT resources. In practice, many companies use a mix: keeping core systems on perpetual licenses while using subscriptions for new cloud services.
The right choice depends on total cost of ownership considerations, flexibility requirements, and how much control versus convenience your organization wants.
