Guest blog post by Amy Konary, Vice President, IDC

For decades, success in the software business required executing on the following:

1. Make a Killer Product

2. Drive down Marginal Costs

3. Sell as many Units as Possible

4. Repeat Steps 1-3

Traditional software monetization models have been built to support this approach. However, today’s software customers are focused on using what they have, rather than buying more.  In addition, traditional models motivate the software vendor to sell as much software as possible — even if it’s more than customers need.  These dynamics have contributed to a software industry that is product- and feature-rich, but customer-experience-poor.

The software industry is changing, as customers demand better experiences and new ways of buying. Software monetization models need to change as well. Some of the dynamics fueling this include the adoption of mobile, virtualization, Cloud Computing, and the “bring-your-own-device” (BYOD) trend.

One of the first shifts IDC has seen is the move toward subscription. Subscription is not just for Cloud. Most of the top 100 software companies are generating subscription revenues:

  • 57% of the top 100 software vendors worldwide had subscription revenue in 2012.
  • For 16% of the top 100 software vendors worldwide, subscription represents greater than 50% of total software revenue.
  • For the top 25 software companies (with subscription), subscription revenue grew an average of 17% from 2010 to 2011

But getting subscription right is challenging.  Instead of selling units, subscription is about monetizing relationships. Success is not just about shipping new units or signing new subscribers– it’s also about reducing churn. The customer is continually making a decision whether they want to continue to buy. Shiny new features and functions may lure customers in, but they won’t renew if they aren’t satisfied with their experience.

In addition to subscription, customers want higher utilization/optimization rates for their software licenses and this is driving interest in usage-based pricing.  To be successful, software vendors need to select the right metrics, and customers need to have systems for monitoring and controlling usage.

With all of these changes, software pricing and packaging can no longer be an afterthought. The focus of product management is primarily on the features and functions. Software companies don’t spend enough time determining pricing and packaging, or explaining it to customers. It’s as if they are saying, “Here’s a shiny new thing. Isn’t it awesome? Don’t worry about the details. We don’t have time now (or it isn’t the appropriate time) to talk about pricing.”

This is no longer a strategy without consequence. Customers want pricing transparency. In addition, a software company that doesn’t spend enough time on pricing won’t be able to rapidly support new monetization approaches from a process or technology perspective.

Change is on the horizon, but it is certainly change for the better. The new look of software monetization includes pricing and packaging that is full-featured, transparent, and customer experience friendly. It also means balancing flexibility and simplicity. To make this happen, software vendors must update the ways in which they manage licensing, entitlements, and billing — with a “mission command” view.

 

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