S/4HANA License Types: On-Premise, Cloud & Subscription Models

S/4HANA License Types

Introduction – Why S/4HANA Licensing is Confusing

SAP S/4HANA offers multiple licensing approaches – from traditional on-premise perpetual licenses to cloud-based subscriptions and the newer RISE with SAP bundle. This variety has left many CIOs and procurement leaders confused.

Each model comes with different cost structures, deployment options, and obligations, making an apples-to-apples comparison difficult.

SAP’s aggressive “cloud-first” push adds to the confusion. Buyers often struggle to determine if an on-premise vs. cloud license model best fits their strategy, or if SAP’s all-in-one RISE offering truly delivers value.

A clear understanding of these S/4HANA license types is critical to avoid unexpected costs or vendor lock-in. Read our S/4HANA Licensing 2025 – The Executive Playbook.

The goal is to choose a model that aligns with your organization’s budget, control requirements, and long-term roadmap – not just what SAP is marketing.

S/4HANA On-Premise Licensing Model

On-Premise (Perpetual License):

This traditional model involves purchasing a perpetual software license for S/4HANA with a one-time upfront fee.

You own the software rights indefinitely. In addition, you pay SAP annual maintenance (typically ~20% of the license price) for ongoing support, patches, and upgrades.

This is a CAPEX-heavy approach: a large upfront investment, then recurring maintenance fees each year.

With an on-premise S/4HANA license, you have flexibility in deployment. You can run S/4HANA on your own servers in a data center or even host it on a cloud infrastructure of your choice (IaaS), but under your control. You are responsible for installing and managing the system (or hiring partners to do so).

Licensing is usually based on named users (e.g., Professional, Limited, or Employee self-service users) and sometimes additional metrics for certain add-on modules. Once licensed, you can use the software as long as you want – even if you stop paying maintenance, the perpetual rights remain (you just won’t get updates or official support).

On-premise deployment offers maximum control. You decide when to apply software upgrades or implement new features.

You can customize S/4HANA extensively – modifying code, adding custom add-ons, and integrating third-party systems as needed. However, this freedom comes with responsibility.

Your IT team (or hosting partner) must handle all infrastructure, backups, security, and upgrades. Highly customized systems can also become complex to maintain, making upgrades more labor-intensive.

Pros of On-Premise S/4HANA Licensing:

• Full Control: You manage the environment, data, and upgrade timeline. This is ideal for organizations with strict governance or unique customization needs.
• Long-Term Asset: The perpetual license is a one-time investment (CAPEX). If you plan to use the system for many years, it can yield a lower total cost of ownership after the initial payback period.
• Flexibility in Deployment: Can be run on any infrastructure (on-site or in cloud IaaS) and is not tied to SAP’s data centers. You’re not forced into automatic updates – you upgrade on your schedule.

Cons of On-Premise S/4HANA Licensing:

• High Upfront Cost: Large initial license fees and implementation costs. Budgeting for a big CAPEX outlay can be challenging, especially for smaller enterprises.
• Annual Maintenance Fees: You’ll pay yearly support fees (often 20%+ of license value), which add to ongoing costs. Over a decade, maintenance can sum to more than the original license cost.
• Upgrade and Support Burden: Your team is responsible for keeping the system up to date. Upgrades are optional, but delaying them too long can leave you on outdated software. Each upgrade project can be costly and resource-intensive, particularly if the system is heavily customized.

S/4HANA Cloud Subscription Licensing Model

Cloud Subscription (SaaS Model):

The S/4HANA Cloud licensing model is a subscription-based approach – essentially renting the software as a service. Instead of buying a perpetual license, you pay a recurring subscription fee (typically annually, over a 3-year or 5-year contract).

This OPEX model encompasses software usage rights, hosting on SAP’s cloud infrastructure (or its hyperscaler partners), regular upgrades, and basic support, all in one package.

Under a cloud subscription, you generally license S/4HANA based on the number of users or an equivalent metric. SAP often uses “Full User Equivalents (FUE)”, which aggregates different user types into a simplified quantity.

For example, you might subscribe to 500 FUEs, which could represent a mix of heavy and light users as defined by SAP. The key is you’re paying for capacity or users regularly, rather than owning any software outright.

With S/4HANA Cloud (especially the Public Cloud edition), SAP manages nearly all technical operations. The system runs in a multi-tenant environment with standardized processes. SAP handles infrastructure provisioning, backups, and applies updates on a fixed schedule (for example, quarterly feature releases).

Your organization focuses on using the system and configuring allowed settings, but cannot alter core code. New features and patches are pushed automatically by SAP, keeping you always on the latest version.

This SaaS approach offers quicker time-to-value and less IT overhead. You avoid heavy upfront costs – subscription payments are spread out and more predictable. It’s easier to scale the user count up (by increasing your subscription) if your business grows.

However, scaling down for lower usage can be difficult until contract renewal. Another consideration is the exit strategy: if you decide to cancel the subscription after your term, you lose access to the software entirely and must migrate your data out.

Pros of S/4HANA Cloud Subscription:

• Lower Upfront Cost: Little or no initial license fee – you pay as you go. This OPEX model can be more budget-friendly and better aligned with monthly/annual operating costs.
• SAP-Managed Updates: Your system is always current. SAP handles upgrades, patches, and maintenance, relieving your IT team of that burden. This ensures access to the latest innovations without big upgrade projects.
• Fast Deployment & Scalable: Provisioning is faster since the infrastructure is ready in SAP’s cloud. It’s relatively easy to add more users or storage as needed. The standardized environment can speed up initial implementation with SAP’s best practices.

Cons of S/4HANA Cloud Subscription:

• Limited Customization: In the public cloud edition, you must largely adapt to SAP’s standard processes. Deep custom coding or modifications are not allowed, which may not be suitable for businesses with unique process requirements.
• Higher Long-Term Cost: While upfront costs are low, the cumulative subscription fees over many years can end up higher than a one-time license. You essentially pay indefinitely; there’s no asset owned at the end.
• Harder Exit Strategy: Stopping the subscription means losing your ERP system access. Transitioning off a SaaS can be complex – data extraction and re-implementation elsewhere involve significant effort. There is also a medium vendor lock-in risk: you’re reliant on SAP’s cloud services, and switching to another solution or to on-premise down the road is not trivial.

Learn how to do the calculations, Full User Equivalent (FUE) & User Licensing Explained for S/4HANA.

RISE with SAP Licensing (Cloud Bundle)

RISE with SAP is a special offering introduced in 2021 – essentially an all-in-one cloud subscription bundle.

It packages the S/4HANA software license together with infrastructure, technical managed services, and additional cloud services under a single contract.

SAP often touts RISE as a concierge service: one contract, one responsible party (SAP) for your entire S/4HANA cloud solution.

This model is subscription-based as well, typically a multi-year agreement paid per user/FUE per year, but it differs from a standard SaaS subscription in scope.

In a RISE with SAP deal, you get a private cloud edition of S/4HANA (or optionally the public edition, depending on your needs) hosted by SAP on a hyperscaler of your choice (AWS, Azure, GCP, etc.).

The RISE contract covers software usage, the underlying cloud infrastructure, SAP’s technical managed services (monitoring, updates, support), and often credits or access to other SAP products like the Business Technology Platform (BTP) and SAP’s business networks.

SAP positions RISE as the future of ERP licensing – a way to get to S/4HANA “as a service” without the complexity of managing multiple vendors.

From SAP’s perspective, RISE simplifies the customer’s move to the cloud (while securing SAP a steady subscription revenue).

From the customer perspective, convenience and simplicity are the main draws: you negotiate with SAP alone for everything, and SAP coordinates the cloud infrastructure and services. For organizations without large IT staffs or those looking to modernize quickly, this one-stop shop can be attractive.

However, savvy buyers should be aware of the trade-offs. Vendor lock-in risk is high – you are entrusting your core ERP to SAP entirely, and disentangling from a RISE contract can be even harder than leaving a standard cloud subscription. You don’t own any part of the stack (licenses or infrastructure).

Pricing can also be opaque: SAP provides a single bundled price, making it hard to tell if, for example, the infrastructure component could be obtained cheaper directly. Flexibility is limited; you can’t, for instance, decide to shift your S/4HANA workload to a different data center or take over management yourself without re-negotiating or leaving RISE.

SAP also typically requires customers moving to RISE to convert their existing licenses. If you already bought on-premise S/4HANA or ECC licenses, those are usually turned in or credited as part of the RISE subscription deal (you won’t keep both).

This can yield credits or discounts in the RISE pricing, but it also means if you ever want to revert to on-premise, you might need to repurchase licenses.

Pros of RISE with SAP:

• One Contract, One Responsible Party: Simplifies procurement and vendor management – SAP handles software, hosting, and support. This can reduce complexity in dealing with multiple providers and ensure accountability (having one point of contact).
• Bundled Services: Includes not just S/4HANA but also infrastructure and often extras like SAP BTP, analytics, or network services. Everything is pre-integrated under SAP’s umbrella, potentially accelerating your transformation with a complete package.
• SAP-Managed Cloud: Less need for in-house technical expertise for running S/4HANA. SAP and its partners manage system administration, uptime, security patches, and updates. For companies with limited IT resources or looking to quickly adopt S/4HANA, RISE offers a faster, lower-hassle path.

Cons of RISE with SAP:

• Vendor Lock-In: You are heavily tied to SAP’s ecosystem. The contract bundles so much that switching providers or bringing operations back in-house later is difficult. If you want to exit, you’ll essentially need a full reimplementation or a very complex transition.
• Limited Flexibility: While the private edition in RISE allows more customization than public cloud, you still must fit within SAP’s cloud parameters. You cannot choose a different infrastructure provider outside SAP’s offering or independently adjust the service levels beyond what’s in the contract. SAP will largely dictate your upgrade schedule.
• Complex Pricing & Potentially Higher Cost: The “all-in-one” price can hide costs. It might include things you don’t need, or that are priced higher than market rates. Without transparency, you may overpay for certain elements. Additionally, RISE contracts are typically bespoke – negotiating them can be complex, and unwinding any piece of it (like reducing users or removing a component service) is challenging.

SAP markets RISE as the default going forward, but buyer beware: it’s not the only path.

Some customers will find it strategically and financially better to stick with traditional licensing or a simpler cloud subscription, especially if they want more control or cost clarity.

Comparing S/4HANA Licensing Models

To summarize the differences, the table below compares the major S/4HANA licensing models across key criteria:

Model highlights:

On-premise solutions offer the most control and independence, but require more effort and upfront investment.

A pure Cloud subscription offers convenience and lower maintenance effort, at the cost of flexibility and potentially higher long-term fees. RISE with SAP provides an integrated solution with minimal customer IT burden, but it introduces strong dependency on SAP and less financial transparency.

Perpetual vs Subscription – Key Considerations

Deciding between a perpetual license model and a subscription model comes down to balancing budget preferences, long-term total cost, and flexibility needs:

• Cost and Budgeting: A perpetual license (on-premise) means a big one-time investment followed by smaller annual fees. It can pay off over time if you use the system for many years because after the break-even point, you’re mainly paying maintenance. In contrast, a subscription spreads costs as an ongoing operational expense. There’s no large upfront fee, which appeals to organizations avoiding CAPEX. However, the total lifetime cost of subscriptions may end up higher if you retain the software for a decade or more. It’s akin to buying vs. renting – buying costs more initially but might be cheaper in the long run, whereas renting is easier to start but never builds equity.
• Flexibility and Scalability: Subscriptions provide flexibility to grow usage and sometimes shrink if needed (usually at renewal cycles). If your user count or business size is expected to change significantly, a subscription can adapt more readily (you add or remove licenses in your agreement). Perpetual licenses are fixed assets – scaling up means buying additional licenses, and scaling down leaves you with shelfware. For a rapidly evolving company or uncertain requirements, the agility of subscription can be advantageous.
• Control and Governance: Companies with strict data control, regulatory, or customization needs might lean toward on-premise perpetual licensing. Owning the software allows greater control over changes and timing. If your organization has a mature IT capability and wants to govern the environment tightly, perpetual models support that. On the other hand, if you prefer to offload technical management and focus on using standard processes, a subscription (cloud) model aligns well. It delegates control to the vendor (SAP) in exchange for simplicity.

Ultimately, there is no one-size-fits-all answer. Perpetual vs. subscription is a strategic choice: consider your financial model (CapEx vs OpEx preference), your expected system lifespan, and how much autonomy you require.

Many enterprises perform a 5-10 year TCO analysis comparing on-premise and cloud solutions to determine which is economically favorable given their specific assumptions.

It may turn out that a perpetual license saves money over 7+ years of use – or that the flexibility and lower upfront cost of a subscription justifies the extra expense for your organization’s needs.

Cloud Edition S/4HANA Licensing Options

Not all “cloud” S/4HANA is the same. SAP actually offers two main flavors of S/4HANA Cloud, often termed Public Cloud vs. Private Cloud (formerly “Essentials” vs. “Extended” editions):

• S/4HANA Cloud, Public Edition: This is a multi-tenant SaaS offering where your S/4HANA system runs in a shared environment alongside other customers. It’s highly standardized – SAP imposes strict limits on modification to ensure all customers are on a uniform code line. You primarily configure predefined processes. Upgrades are pushed quarterly to all users. Licensing is subscription-based per user or FUE. The public cloud edition is ideal for companies that can utilize SAP’s best-practice processes with minimal need for customization. It often has a lower entry cost and faster deployment, since you adopt out-of-the-box processes. However, license portability is essentially zero here: you cannot take a public cloud subscription and later convert it to an on-premise license – it’s a completely different model.
• S/4HANA Cloud, Private Edition: This is a single-tenant cloud instance dedicated to your company. In many cases, this comes via a RISE with SAP contract (though there are legacy programs like SAP HANA Enterprise Cloud where you could bring your own license). The private edition gives you an environment more akin to a traditional on-premise system, but hosted by SAP (or a partner) and paid as a subscription. You can carry over some of your existing custom ABAP code, perform modifications within agreed limits, and choose a slower upgrade cadence (for example, applying updates once a year instead of quarterly). Because it’s your own instance, there’s more flexibility to shape the system, though still within the bounds of SAP’s cloud policies. Private edition suits organizations that want cloud benefits (SAP-managed infrastructure, subscription pricing) but need more customization or control than the public SaaS can offer. It does come at a higher price point than public cloud due to dedicated resources. In terms of portability, moving out of private edition is slightly easier – for instance, if absolutely needed, you might negotiate transitioning that system to an on-premise deployment since technically it’s your own instance (though contractually not straightforward).

When evaluating cloud editions, consider the trade-off between standardization and customization. Public edition has a lower total cost and complexity if it meets your requirements, but any gap in functionality requires your business to adapt to SAP’s way. Private edition can fill those gaps by allowing custom solutions, but expect higher costs (both in subscription fees and in implementation effort) and a commitment to SAP’s cloud infrastructure.

Total cost of ownership can vary widely: some mid-sized firms save money with the lean public cloud, whereas large enterprises sometimes find private edition (or even on-prem) more cost-effective when they factor in the need for extensions and integrations.

Negotiation Leverage Points Across Models

No matter which S/4HANA licensing model you consider, there are negotiation opportunities to ensure you get a fair deal and maintain flexibility. Here are key leverage points for each model:

• On-Premise: Negotiate maintenance and software. The annual maintenance rate (typically 22%) can sometimes be negotiated down or pegged at a fixed percentage if you’re making a significant purchase – don’t just accept the standard rate without discussion. Also, review your existing SAP licenses for shelfware (unused licenses). SAP may allow you to reallocate or credit unused licenses towards your S/4HANA purchase. For example, if you own legacy ERP user licenses, you won’t need to post-migrate, ask SAP for conversion credits, or swap programs to avoid paying twice. Additionally, if you are sticking with on-premise, ensure you get contractual flexibility such as transfer rights (to move licenses to cloud infrastructure or a different subsidiary) and a lock on maintenance percentage increases.
• Cloud Subscription: Push for volume discounts and flexibility. In cloud deals, SAP often has tiered pricing based on the number of users or revenue bands – leverage your scale. Negotiate tiered pricing so that as your usage increases, the incremental cost per user decreases. Also seek growth protection clauses: for instance, a cap on price increases at renewal, or the ability to reduce users at renewal without penalty if your needs drop. Ensure the contract defines how additional users or modules will be priced in the future (so you aren’t surprised by list prices later). If you’re transitioning from an on-prem license, inquire about conversion discounts (SAP has programs to convert perpetual licenses into cloud subscriptions at a reduced cost). Finally, clarify data ownership and extraction rights in the contract to protect yourself if you ever leave the SaaS.
• RISE with SAP: Negotiate the bundle and exit terms. With RISE, scrutinize what’s included. You may not need all components of SAP bundles – see if you can carve out services you already have or prefer to source separately (for example, if you have an existing hyperscaler contract or prefer a third-party support for certain apps, try to exclude those costs). Ask for migration credits for any on-premise licenses you’ve previously bought; these should significantly offset your RISE subscription price. Most importantly, negotiate your exit strategy up front: ensure the contract has clear provisions for how you can retrieve your data and perhaps even convert to a regular license if the RISE agreement ends. Try to include a clause that outlines obligations if you don’t renew – e.g., assistance from SAP in migrating to an alternate environment or an option to retain the software on-premise (even if at an additional fee). Also, lock in renewal pricing caps if possible; you don’t want a steep price hike after the initial term when you’re most captive. Given RISE’s complexity, don’t hesitate to involve legal and licensing experts to fine-tune terms on liability, service-level agreements, and to unbundle any costs that seem excessive.

In all negotiations, remember that SAP’s sales team has strategic goals. Currently, SAP is highly motivated to sign cloud contracts – this can be to your advantage.

Cloud deals (SaaS or RISE) might come with extra incentives (deep discounts, free SAP BTP credits, extended support for your old SAP system during migration, etc.) if you show willingness to consider the cloud.

Use that to get concessions. Conversely, if you prefer on-premise, leverage the fact that you have alternatives (including staying on ECC longer, or third-party support) to push for a better price on S/4HANA licenses and maintenance. Do your homework on pricing benchmarks and don’t accept the first quote.

Checklist – Choosing the Right S/4HANA Licensing Model

When evaluating S/4HANA licensing options, use this checklist to ensure you’ve covered all the bases:

• Assess on-premise vs. cloud TCO: Model out the total cost of ownership for each option over a realistic period (5–10 years). Include license/subscription fees, maintenance, infrastructure, personnel, and upgrade costs. Identify at what point a subscription might overtake perpetual in cost, or vice versa.
• Map customization needs to the model: Inventory your business process requirements and customizations. If you have heavy custom development or unique processes that S/4HANA must support, verify whether those can be accommodated in a public cloud model. If not, you may lean towards on-premise or a private cloud. Ensure the chosen license model won’t force you to compromise critical capabilities.
• Identify lock-in risks and plan an exit strategy: For each model, consider how easy or hard it is to change course. If you go to the cloud and need to exit later, what’s the plan? If you choose RISE, what happens at the end of the contract? Make sure you have contractual protections or at least a documented internal strategy for a future transition (even if it’s unlikely). Avoid any model that would be catastrophic to leave without a viable backup plan.
• Secure migration incentives or credits: Engage SAP early about incentives. If you’re an existing SAP customer, leverage that. Ask about conversion programs (for turning old SAP licenses into S/4HANA subscriptions), discounts for multi-year commitments, or bundling deals (perhaps including other SAP products your company might use). Make SAP compete for your business by also evaluating third-party cloud hosting or other scenarios, then use those comparisons in negotiations.
• Align licensing with your long-term roadmap: Ensure the model fits your company’s future. Are you aiming to move all systems to the cloud in the next few years? Or do you require on-prem control due to industry regulations? Does your executive team prefer CAPEX or OPEX spending over the long haul? The S/4HANA license choice should support your IT and business strategy for the next decade. Consider SAP’s own roadmap too (e.g., support timelines for on-premise, and the pace of innovation in cloud) so you’re not caught off-guard by external shifts.

By following this checklist and understanding the nuances of each S/4HANA license type, you can cut through the confusion.

The key is to make a buyer-first decision based on your organization’s needs and leverage, rather than simply accepting SAP’s recommended path.

With the right model and a well-negotiated contract, you’ll set a strong foundation for your S/4HANA journey that balances cost, control, and flexibility.

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