Open source (maintenance only), Ad based revenue models and Subscription based pricing within the context of SaaS has truly redefined (and continue to do so) the way software products are priced. Although, open source and Ad based model are still in their nappies, Subscription based pricing is witnessing steady growth as more and more vendors move their software from On-Premise to “On-Demand”. Although, On Demand doesn’t necessarily guarantee “subscription based pricing” as proved in the case of “Oracle On-Demand” but most "On-Demand" players have a subscription based pricing model. Probably the right word to use here is SaaS and not On-Demand as analysts are increasingly mandating “subscription based pricing” as an important criterion for a software to be qualified as SaaS.
AMR Research defines SaaS as an application that:
· Has no upfront license fees associated with the use of the software (a subscription fee is generally billed monthly with a one- to two-year contract).
· Requires no IT infrastructure at the client site other than desktop devices and Internet access.
· Is deployed as multitenant (multiple customers sharing a single copy of the software) or single-tenant standard code maintained and upgraded by the vendor.
Has support and upgrades included in the monthly service fee.
Alright, I digressed a bit. This article is not about SaaS or subscription based pricing but it is about the traditional way of pricing software – Software Licensing. As I mentioned in my previous post (Software Pricing - The first P), one of the ways in which software companies have been able to link pricing with the benefit received from the product is by relating pricing with the “extent of usage” of the product. Although, this is not the best way of establishing the price-benefit equation, it is the easiest. In this article, I plan to describe some of the more common / traditional approaches to software licensing.
Per seat / Per named user - Traditionally the most widely used approach to software licensing was per seat or per named user. In this approach, for a given price a minimum no. of “named user” access is provided and for every additional seats an extra per seat price is charged. The client organization is required to comply with the agreed upon “number of seat” for the price charged. This approach works best when the user base is “named” i.e. clearly identified. And the extent of usage of the product directly correlates with the number of users using it. E.g. any desktop application.
Concurrent User – Another way in which the “extent of usage” of a product can be regulated is through ensuring restricted concurrent or simultaneous access within a slice of time (usually a fraction of a second). This works well when the size of the user base varies within a range. For example a knowledge management solution running behind a customer self-service website. The extent of usage here depends on the website traffic looking to get a problem solved. Client organizations typically pay for upto 75% of the peak concurrent access.
Per CPU – This approach to pricing assumes that the extent of usage is decided by the processing capacity of the processor. More the CPUs more the capacity and more the usage and hence more the price. Although, this mode of pricing is being increasingly abandoned most vendors still offer the “per CPU pricing option”. In fact, with the evolution of processors and the wide adoption of dual and quad processors, software companies have faced some interesting challenges in designing the per CPU pricing model. You can read about an interesting article on Oracle in this context here - http://news.com.com/Oracle+shifts+multicore+licensing+model/2100-1012_3-5788788.html
Per Server – This approach is a derivative of the per CPU model, typically used in situations where the extent of usage is a function of server capacity and not processing alone.
Other usage based pricing options - There are a few other usage based pricing options that correlate the price with number of units of the final work item it produces or work upon. For e.g. an analytics product company can price its product based on the “size” of the raw data it would be working on or a search product can price itself based on the number of documents it indexes etc.
The enforcement of these pricing options is still primarily being implemented through Legal Contract (in the case of as many as 51% of all software vendors) followed by Electronic / Digital enforcement (as in the case of around 45% of software vendors). Less than 5% of vendors are able to enforce their pricing options through online logging, these are primarily the SaaS providers.
SaaS has really opened up multiple new avenues to price software with aspects like subscription based pricing, correlating pricing to unit of work/transaction and so on. I plan to discuss the SaaS way of pricing in my next post. Till later. Ciao.
Tuesday, August 22, 2006
Wednesday, August 09, 2006
Software Pricing – The first P
Pricing as a topic is very close to my heart and hence it did not take me a lot of thinking before I selected this topic for my second post. The reason why I am a big fan of pricing is because I believe that pricing is definitely the single biggest reason why a prospect will not buy your product or service, and it is one of the biggest reasons why (s)he would. Now don’t get me wrong, of course the product features, reliability, brand etc. are equally important in the buying process but these are assessed good or bad only in the context of pricing.
The monetary consideration a buyer foregoes in exchange of a software product or service is the single biggest risk a customer takes against the service being offered. This is the risk of non deliverance on the expected benefits against the outlay. The more the price, the more the outlay and hence more the impact of the risk. Although the chance of risk is controlled by the merit of the product/service the extent of impact is certainly controlled by price.
The way you price is the single biggest barrier for your prospect to enter into a contract with you.
Now, I am in no way suggesting that to reduce the barrier “the per unit price” has to be discounted, definitely no. But to reduce the barrier, the price (customer’s risk) has to be positively co-related with the results your products/service promises to deliver. A few organizations do speak about value based pricing which will try and establish this correlation but the instances of this are too few to suggest if the trend has caught on. In most cases it is a way to gain a prospects attention akin to other catchy(?) words like “New”, “Improved”, “Better” and so on.
Traditionally pricing of software has been very defensive, by defensive I mean correlating pricing with either the costs of delivering the goods or competitive prices. That much coveted correlation with the benefits realized by customers remains elusive. The closest that software pricing has got to this is by linking pricing with “extent of usage” by customers – licensing software products by number of users, per processor etc are examples of this approach. Software as a Service (SaaS) further promises to refine this but then again it’s a promise.
One of the challenges of creating a price/value correlation is that while my cost and price are tangible, value is subjective, it’s interpreted and hence there is no universal scale on which value can be measured. This challenge is a very difficult challenge and is one reason why most software providers have kept some distance from it.
This was an introductory post and in my next posts I intend to further explore this topic and write about the various ways in which software product vendors and software service vendors have priced their goods. I would follow these posts with a post on “value based pricing” and its application in the context of IT service provides. I will also be curious to know if you have any suggestions on any other topic around pricing, do let me know.
The monetary consideration a buyer foregoes in exchange of a software product or service is the single biggest risk a customer takes against the service being offered. This is the risk of non deliverance on the expected benefits against the outlay. The more the price, the more the outlay and hence more the impact of the risk. Although the chance of risk is controlled by the merit of the product/service the extent of impact is certainly controlled by price.
The way you price is the single biggest barrier for your prospect to enter into a contract with you.
Now, I am in no way suggesting that to reduce the barrier “the per unit price” has to be discounted, definitely no. But to reduce the barrier, the price (customer’s risk) has to be positively co-related with the results your products/service promises to deliver. A few organizations do speak about value based pricing which will try and establish this correlation but the instances of this are too few to suggest if the trend has caught on. In most cases it is a way to gain a prospects attention akin to other catchy(?) words like “New”, “Improved”, “Better” and so on.
Traditionally pricing of software has been very defensive, by defensive I mean correlating pricing with either the costs of delivering the goods or competitive prices. That much coveted correlation with the benefits realized by customers remains elusive. The closest that software pricing has got to this is by linking pricing with “extent of usage” by customers – licensing software products by number of users, per processor etc are examples of this approach. Software as a Service (SaaS) further promises to refine this but then again it’s a promise.
One of the challenges of creating a price/value correlation is that while my cost and price are tangible, value is subjective, it’s interpreted and hence there is no universal scale on which value can be measured. This challenge is a very difficult challenge and is one reason why most software providers have kept some distance from it.
This was an introductory post and in my next posts I intend to further explore this topic and write about the various ways in which software product vendors and software service vendors have priced their goods. I would follow these posts with a post on “value based pricing” and its application in the context of IT service provides. I will also be curious to know if you have any suggestions on any other topic around pricing, do let me know.
The raison d'être
Hi there, it really feels great to write my first blog here. So let me introduce myself – I am http://software-marketing.blogspot.com/, and I am here to speak on two of my favorite topics - software and marketing, and everything that lies in between. Now, wait a minute, aren’t these topics too broad? Sure, let me try and scope this for us. Let me start with the easier and older topic first – Marketing. Kotler defines Marketing as “Marketing is human activity directed at satisfying needs and wants through exchange processes”. Now, although this sounds like a more cerebral definition this doesn’t define the nuances. Another definition that appealed to me is –
“Marketing is the ongoing process of moving people closer to making a decision to purchase, use, follow...or conform to someone else's products, services or values. Simply, if it doesn't facilitate a "sale" then it's not marketing." (Source – www.wikipedia.org).
I like it simply because it is more concrete and direct and gets closer to the nuts and bolts. Thus, we will stick with this definition and look at possible marketing activities that can be visualized in the scope of above description. Let me try and define software here, not with the intent of educating my readers (I won’t even try and have absolutely no illusions about my capabilities here) but with the idea of creating a scope around which I would like to discuss my ideas. Thus by software, I mean IT services, software products, Web 2.0 and other internet based companies including but not limited to search engines, eCommerce, e-Learning and so on. The beauty of adding “and so on..” is that it allows me that much needed ability to scale (read digress) into other topics that I may not be able to think of right now but might soon develop my interest in :-).
And as I write this piece, I realize that this flexibility is so very important. I am using MS Word to write this article and I realize that every time I write the word “blog”, MS Word introduces the universally known “twigly”, suggesting that it doesn’t recognize this word. How outdated? Now, the word “blog” is not new and has been around since 1999 but our friends at Microsoft did not think that it’s too important a word to be included in their lexicon in the latest version of MS Word. As I write this, a Google search string on “blog” shows more than 2.5 Billion search results!! The word “Blog” indeed deserves recognition.
Okay okay, I know I am digressing but the simple point that I am trying to drive is that we realize that software and the definition of it is evolving and can take shapes and forms that we may not be able to foresee now, and hence we will try and keep the scope of “software” so that we can (and I am sure we will) digress a bit :-).
Thus the reason for existence of this blog is to discuss every marketing related topic in the context of software.
The source of my words in this forum would be my experiences, my thoughts, my readings and of course the internet. I spend my time reading on software marketing, and from today onwards, I would like to share (on this blog) everything interesting that I come across. And to really complete this blog, I will need your inputs through feedback, ideas and agreements / disagreements.
I guess, this is enough to explain the raison d'être of http://software-marketing.blogspot.com/, now lets get into the act. I am thinking of choosing between a few topics – software pricing,
service vs. product marketing, marketing campaigns – for my next blog....Any suggestions?
“Marketing is the ongoing process of moving people closer to making a decision to purchase, use, follow...or conform to someone else's products, services or values. Simply, if it doesn't facilitate a "sale" then it's not marketing." (Source – www.wikipedia.org).
I like it simply because it is more concrete and direct and gets closer to the nuts and bolts. Thus, we will stick with this definition and look at possible marketing activities that can be visualized in the scope of above description. Let me try and define software here, not with the intent of educating my readers (I won’t even try and have absolutely no illusions about my capabilities here) but with the idea of creating a scope around which I would like to discuss my ideas. Thus by software, I mean IT services, software products, Web 2.0 and other internet based companies including but not limited to search engines, eCommerce, e-Learning and so on. The beauty of adding “and so on..” is that it allows me that much needed ability to scale (read digress) into other topics that I may not be able to think of right now but might soon develop my interest in :-).
And as I write this piece, I realize that this flexibility is so very important. I am using MS Word to write this article and I realize that every time I write the word “blog”, MS Word introduces the universally known “twigly”, suggesting that it doesn’t recognize this word. How outdated? Now, the word “blog” is not new and has been around since 1999 but our friends at Microsoft did not think that it’s too important a word to be included in their lexicon in the latest version of MS Word. As I write this, a Google search string on “blog” shows more than 2.5 Billion search results!! The word “Blog” indeed deserves recognition.
Okay okay, I know I am digressing but the simple point that I am trying to drive is that we realize that software and the definition of it is evolving and can take shapes and forms that we may not be able to foresee now, and hence we will try and keep the scope of “software” so that we can (and I am sure we will) digress a bit :-).
Thus the reason for existence of this blog is to discuss every marketing related topic in the context of software.
The source of my words in this forum would be my experiences, my thoughts, my readings and of course the internet. I spend my time reading on software marketing, and from today onwards, I would like to share (on this blog) everything interesting that I come across. And to really complete this blog, I will need your inputs through feedback, ideas and agreements / disagreements.
I guess, this is enough to explain the raison d'être of http://software-marketing.blogspot.com/, now lets get into the act. I am thinking of choosing between a few topics – software pricing,
service vs. product marketing, marketing campaigns – for my next blog....Any suggestions?
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