Once upon a time, you bought software the way you bought a toaster. Walk into a store. Pick up a box. Hand over money. Take it home. Install the software and run it. The package was yours forever.
This delivery method applied everywhere. Microsoft (MSFT +1.03%) Windows came in a box, and so did the Office suite. Adobe (ADBE +0.40%) Photoshop came in a box. The box contained floppy disks, then CDs, then DVDs. Enterprise-class stuff like the Oracle (ORCL +3.02%) database may have come on a roll of magnetic tape in the 1980s. You also got a manual nobody read and a registration card nobody mailed.
Whatever software you needed, you paid for it once. Then it was yours forever.
This arrangement had a certain elegance. There was a problem, though. Software companies made money only when you decided to upgrade. Convincing a graphic designer that Photoshop 7 was worth $500 when Photoshop 6 handled most jobs just fine required a combination of actual innovation and creative marketing.
NYSE: CRM
Key Data Points
Salesforce has an idea
In 1999, Salesforce (CRM +1.17%) proposed something different. What if you didn't buy software at all? What if you just rented access to it? The programs could largely run in a web browser, and Salesforce got to bill its clients every month.
The enterprise software world was skeptical at first. Then it was intrigued by this easy-to-use model with its simpler upgrade paths. Then it grew alarmed at how fast Salesforce was growing.
Adobe rips off the bandage
The subscription model simmered for years in enterprise software, but consumer and creative software stayed boxed. That changed in 2013, when Adobe announced that the Creative Suite DVD was dead. Long live the new king, Creative Cloud! Subscribe or find another photo editor. The programs served the same purposes as always, just with a different access and payment format.
Photographers, video developers, and graphic designers reacted with the calm, measured response you'd expect. Comment sections caught fire. Petitions circulated. Then everyone subscribed anyway, because what were they going to do, learn GIMP or PaintShop Pro?
Adobe's revenue got predictable. The stock soared. Adobe stock had a couple of turbulent years but ended up with triple the S&P 500's (^GSPC +0.77%) returns from the start of 2013 to the end of 2015. Every other software company took notes, and the whole industry started adopting software-as-a-service (SaaS) policies.
Image source: Getty Images.
The seat-counting years
Subscription pricing needed a unit. Most companies landed on "seats," whereby payment was made per person using the software. Slack (now owned by Salesforce) charges per user. Zoom (ZM 4.10%) charges per host. Microsoft 365 charges per employee.
This system works reasonably well until your CFO discovers that 40% of the company's Slack "seats" haven't logged in for six months. Then you get an email about "license optimization," and someone in procurement starts asking pointed questions.
Pay for what you use
Cloud computing introduced a different idea: metered billing. Amazon (AMZN 1.08%) Web Services, upon launching in 2006, charged for exactly the compute power and storage you consumed. Use more, pay more. Use less, pay less.
Twilio (TWLO +2.82%) applied this pricing model to communications. Snowflake (SNOW 1.21%) used it for data warehousing. The pitch was clean and clear: Your costs scale with your success.
The catch this time is that the finance team now has no idea what next month's bill will look like. In the "pay-to-use" world, budgeting becomes an exercise in educated guessing.
Meanwhile, in Open-Source Land
While all this commercial drama unfolded, a parallel universe existed where software was free. Not "free trial" free, actually free for any use. The Linux OS led the way. PostgreSQL and MySQL databases followed suit. The Kubernetes software shipping method is another example.
Red Hat figured out how to make money here. Give away the software, charge for professional support. When your production database crashes at 2 a.m., you want someone to call. That service costs money.
IBM (IBM +1.76%) bought Red Hat for $34 billion in 2019, which suggests the model works. Or at least that IBM really wanted to be in the Linux business. IBM's business philosophy has absorbed a lot of Red Hat's DNA. Big Blue is essentially Big Purple nowadays.
NYSE: IBM
Key Data Points
The 2026 situation
Software billing in 2026 is a mix of everything. Base subscriptions. Per-seat fees. Usage charges. Platform fees. Some artificial intelligence (AI) tools are experimenting with charging based on outcomes, though defining "outcome" turns out to be complicated. You can hardly throw a rock in Silicon Valley without hitting a company in the midst of a pricing strategy shift.
Most companies have landed on hybrid models. A predictable base payment that finance teams can budget for, plus variable components that capture value from heavy usage. It's more complex than the old "buy a box" days, but it's also more flexible.
The old box of floppies is gone. The monthly invoice is here to stay. The only questions are how many line items it contains and how the billing data is collected.
The next shift is already underway. Whoever comes up with the most effective pricing model will have a leg up on the competition (until everyone copies it, of course). Keeping an eye on this drama will help you find winning software investments.
