Some Cloud Apps are free and you can’t beat free. But other Cloud Apps have a monthly charge, so you may ask yourself: “Is it cheaper to buy a copy of traditional software than to pay a monthly fee for a cloud app?” This post and the calculator at the end will help you decide.
Similar to the Rent vs. Buy decisions you encounter when choosing a home or a car, you face a general tradeoff between higher on-going costs vs. higher up-front costs, but many other factors play a role as well. Also, it is important to compare the functionality you actually need. The Cloud App may require add-on products to provide the functionality you need, or traditional software may come with many features or modules you will never use. What we want to know is, for the functionality you need, what is the Total Cost of Ownership (TCO) for both options.
Traditional software is sold with a perpetual license that you pay once upfront giving you the right to use the software forever. However software vendors typically charge for periodic upgrades. You may want to upgrade due to new features or capabilities. On the other hand, you may be required to upgrade if the software does not work on the latest hardware or operating system. Software vendors also may stop providing support on products after newer versions are released, an industry practice called “end-of-life”. So eventually you will need to pay to upgrade your software, the question is will it be sooner or later. The basic calculation for traditional software using the example of Adobe Creative Suite (if you can even find a copy):
- A = Upfront License Fee: $1,200
- B = Number of major upgrades: 0
- C = Cost of major upgrade: $0
- X = # years software is in use: 5
Cloud Apps are sold with a subscription license that you pay monthly or annually. Most Cloud Apps allow you to cancel anytime, but some require a longer commitment to get the best price. Cloud App providers have been recently aggressive in raising monthly fees when time comes to renew. The functionality in Cloud Apps is typically made available to all users without need to upgrade or pay a fee. The basic calculation for traditional software using the example of Adobe Creative Cloud (now the only option):
- D = Subscription Fee (Monthly): $50 ($70 for new users)
- E = Subscription Term (Years) = 0
- F = % Annual Cost Increase: 0%
- X = # years software is in use: 5
Total Cost of Ownership (TCO) for Adobe Creative Cloud = (D * X * 12) = $3,000
Many other costs are similar in either traditional software or Cloud Apps. For example, purchases of traditional off-the-shelf software can be written off as a Section 179 business deduction and subscriptions to Cloud App software can generally be expensed on your federal income taxes.
Big companies care a lot about installation, customization, integration, data conversion, training, and change management costs. But for most creative entrepreneurs these costs are essentially $0. In theory hardware costs should be lower for cloud-based apps, but they are not factored here since most creative entrepreneurs will use a mix of cloud-based and traditional software and upgrade hardware for a variety of reasons.
In our overly simplified example of Adobe Creative Suite vs. Adobe Creative Cloud, the Cloud is almost 3 times more expensive over the 5 years of use. Overall, deciding if a Cloud App is a good deal depends on your personal situation. Are you always trying the latest and greatest? Or are you still on Windows XP? How quickly you upgrade and how often you changes providers will make a huge difference in your costs.
This link is an excellent online TCO calculator for helping you determine the best financial deal for you.