Andy on Enterprise Software

On Frogs and Software Pricing

October 6, 2008

I am curious as to the level of take-up of the software as a service (SAAS) model, at least in respect to data management. Of course salesforce.com was the pioneer here, prompting a flood of interest in this approach. Many vendors offer their software in this way as an alternative to the usual “perpetual license” model, yet in many cases it seems to have had limited take-up. The latest vendor to offer their software in this way is Kalido, who are doing so via systems integrator BI partners. There is a lot of sense in SAAS from an end user perspective. A host (if you will excuse the pun) of problems with enterprise software are caused by inconsistencies between the recommended operating environment for a piece of software and what is actually lurking out there in the end user environment. Problems can be caused by esoteric combinations of DBMS, app server, operating system and who knows what, which are very difficult for vendors to replicate, no matter how much trouble they go to in creating test environments. Hosted solutions largely avoid any such issues. Moreover companies can try out software for a limited price per month rather than having to commit up front to a full license, which means that they can pay as they go and pay only for what they use.

For vendors the issue is double edged. By making it easy to try their software they may get customers that would otherwise not have chosen them as they were unwilling to commit to an up-front license cost. However pitching the price is not easy. If your software used to sell at USD 300k + 20% annual maintenance, then if you price the software at USD 5k per month you are seeing the maintenance (USD 60k a year) without the software license fee. Yet if you pitch the monthly fee too high you will scare the customers off and be back into a lengthy sales cycle. Ideally there is some way of pricing that draws customers in further as they use the software more e.g. as they add more users or load more data, gradually increasing the monthly fee. This was actually one of the clever things in the salesforce.com model – it seems really cheap at the beginning, but as you add more and more users you end up with a pretty hefty monthly bill, and can end up wondering how that would have compared to a traditional licence model. But by then you are already committed.

This is ideal from the vendor viewpoint. It is what I will term the “frog in the saucepan pricing model”. The legend goes (and I don’t fancy verifying its veracity) that if you toss a frog into a pan of boiling water it will jump out, but if you put it into a pan of cold water and slowly raise the temperature it does not notice and ends up being cooked. A pricing model that lures the end users in and gradually creeps up without anyone getting upset is certainly what a vendor should aim for. Not all software may be amenable to such gradated pricing, but it seems to me that this is the key if vendors are to avoid SAAS being the “maintenance but no license” model.

4 comments so far

Customers expect any sort of pricing to go down rather than up for buying in bulk. Salesforce seems to have fixed per user pricing which may yield better returns in the near-term but as serious competitors appear this sort of pricing model will be unsustainable. Unless of course the competitor prices it the same way but I’m sure some form of undercutting will appear to get customers signed-up. In fact netsuite are already doing this (http://www.netsuite.com/portal/press/releases/nlpr10-09-06.shtml).

From what I can tell SAAS is certainly picking up and gaining acceptance in the enterprise but I would disagree that its “the end of software(tm)” as the marketing shock-jocks at salesforce would put it.

SaaS is another software delivery mechanism which works for some apps and not for others.

Subscription Pricing is certainly an interesting problem to address. It has to be cheaper than the upfront cost of a perpetual license and also include operating costs (infrastructure, support, maintenance etc). Some vendors are even selling on-premise software with subscription pricing to lower barriers to adoption and help companies ease cost worries caused by the credit crunch. The current economic uncertainty may even fuel the demand for Saas and/or subscription pricing.

Interesting (and turbulent) times ahead for the software industry.

You are spot on about the Salesforce model. Very compelling upfront, but starts becoming pricey as you add a) users, and b) additional functionality.

I think the Kalido option is ideal for the SaaS model – it means that many of the initial headaches will disappear, but, just like Salesforce, this also creates other isses, such as transferring large amounts of data to the cloud. I will be very interested in seeing the proposed pricing for this solution.

Subscription based pricing as an alternative for up front licenses is all about ‘management of expectations’. Up front pricing is by a growing usage a declining line for the customer and a constant line for the vendor. Subscription based pricing is an increasing line (gradually flattening at least that is what the customer should expect)for both the vendor (more revenue) and the customer (more costs). And the question is where and when do both expect that the lines of both models will intersect.

So who is the optimist and who is the pessimist?? But in uncertain times like today moving costs towards the future is something that every CFO is interested in.

Great Article and we are experiencing the what the article talks about. A lot of our customers are going with SaaS as they dont want to deal with IT departments or dont want to spend a lot of money upfront. SaaS makes ROI very attractive.



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