Fast changing marketforces, noise of consolidation and technological advances are fast changing the traditional means of buying software – already a buyer’s market, the way forward looks very challenging form the price perspective. The economist writes," The chipmakers are unleashing powerful disruptive forces". New chip architecture is allowing them to roll out ever more heavy-duty hardware at competitive prices. The real losers in the pending upheaval could well be software suppliers. Firms such as Oracle, SAP and IBM, whose industrial-strength programs are the bedrock of business, could be badly bruised in the process. But inevitably, end users - companies big and small that depend on enterprise software to do their various business transactions - are going to be feeling pressure as well. The current brouhaha over software licensing has been set off by the arrival this month of large quantities of chips containing two central-processing brains (or “cores”) on the same device. With the wholesale switch to dual-core processing, some software firms feel they are about to be short-changed. If two cores on a single chip can do twice the work of a single processor, they argue, then customers paying license fees based on the number of processors running their software (one of the most common forms of software licensing) will be getting a free ride on half the new cores being deployed. Users feel it is grossly unfair for software firms to charge more for improvements that stem entirely from buying better hardware.
Phil Wainewright writes in an insightful article,The issue of value-based pricing for software has come to the fore because of a confluence of industry trends, of which the advent of dual-core processors has become the final straw.The existing pricing model used by software vendors bears absolutely no relation to the utility of the software to an individual customer, being completely arbitrarily based on the number of processors it is installed on. A customer lumbered with a badly designed implementation that scales poorly could easily pay four or five times as much as another for the same features and performance. Whereas hundreds of customers of an on-demand application might share the lower of the two costs between all of them, reducing it to a fraction of the on-premises equivalent. SaaS, emerging service-oriented architectures and grid computing will soon make processor-based pricing universally untenable.
Richard Veryard argues "For the service economy, output based pricing makes much more sense. Consumers pay for what they actually get, rather than what the service provider uses. There are various ways of calculating this, at different levels of granularity, with different distribution of risk" and asks If airlines can manage value-based pricing, why not the software industry?
Phil adds, sofware vendors think they're in the software business when really they're in the business automation business. The true reason for buying software is to have some element of business operations run better, faster or more cheaply. On-demand service providers don't charge for software — in fact they drive their cost of software as low as possible. Instead, customers "buy access to the functionality the software provides. This difference in design intent is the key to understanding the true nature of [the on-demand applications model]." "Software-powered services" shall be the generic name for the on-demand application sector because this is where it ultimately and inevitably leads, to an endpoint where software is simply the infrastructure that powers automated business services. In that scenario, the only way to price is in terms of business results and their perceived value to the customer. The industry too seems to recognise: Oracle's president Chuck Phillips reveals that oracle is looking at moving from processor-based pricing to something more closely related to business metrics: In his own words, "We'd love to get to a mode where we're looking at the number of employees served, the number of checks processed — you name it, some business metric — and take it out of the technology realm and tie our success to their success in terms of business". Aggressive players like Microsoft and wannabe aggressive player IBM should take the lead and respond aprropriately and help in expanding the market - software price is actually an inhibitor in trying new IT initiatives.
Category : Software Pricing