Pricing and Packaging

Aesop’s fable The Grasshopper and the Ant teaches us to “beware of winter before it comes”, meaning that we should anticipate probable outcomes and plan accordingly. Unfortunately for the titular grasshopper, he lacked such foresight and was doomed to spend the harsh winter months without any food. Planning ahead in business might sound glaringly obvious, but all too often, organizations get so caught up in the development of their products, that licensing becomes something of an afterthought to their product development cycle. It’s usually only when a problem occurs that due consideration is given, and even then, it tends to be a cut-and-paste job. This is a rookie mistake, as licensing, when implemented as a software monetization program, can bring tremendous value to an organization.

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Maximizing the potential of any software product is a function of two aspects; maximizing sales and minimizing the waste investment (optimizing cost). Software publishers of cloud delivered applications don’t have to deal with the challenges of physical delivery of the product, yet their ability to reach all the market segments could be limited. Software publishers can realize greater potential from their offerings by optimizing the mix of their packages, pricing and investment in the right features.

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The IT industry is in the midst of a massive structural shift toward a next-generation compute platform called the 3^rd Platform. Interestingly, the rise of the 3rd Platform is happening alongside a customer revolution. Consumer-like expectations for simplicity and transparency are dictating pricing models and terms. Both trends are having ripple effects across the industry. We’re now seeing new business models that align more closely with business outcomes and customer experiences becoming the preferred way of monetizing software.

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Simple were the days when only perpetual licenses were sold, and each ISV decided on one locking criteria to build their price model around – like CPUs, cores or dongles.  Add floating/concurrent licenses, and a volume discount plan, and you had a price list that was pretty straightforward.  It was straightforward for customers, sales reps, customer services, configuration management, etc.  Those days are long gone it seems; ISVs need to offer an ever-growing variety of software licensing models to keep up with customer demands and competitive pressure.  Subscriptions, pre-and post-paid, usage-based licensing, capacity licensing, machine- or user-centric licensing (license follows the user) – the list goes on.  Each license model makes a lot of sense for someone, so where should you stop?

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Today begins one of software monetization’s most prestigious events, LicensingLive 2014!. Held in Cupertino, California, LicensingLive 2014! will feature several industry leaders including Amy Konary, Rhianna Collier, Ray Wang and Jeff Kaplan, discussing the opportunities that exist in the software licensing space.

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Technology has changed many industries in amazing ways. Transportation, manufacturing, healthcare—all have been transformed in the last decade due to increased collaboration, communication, and real-time access to contextual data facilitated by Cloud technologies, mobility, social networks, and analytics technologies. Despite being key enablers to advancement, technology software providers themselves have not always been at the forefront of using technology to transform their businesses from the inside out. However, pressure to transform is coming from all sides, most notably the outside–in. Customers are demanding change with their wallets. Cloud software is growing at more than five times the rate of the traditional packaged software market. By 2018, $1 of every $5 spent on software, and $1 of every $4 spent on applications, will be consumed via the cloud.

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With all major players in the software industry transitioning to the Cloud in some manner, the vast majority of new software companies entering the market are doing so as “providers of Cloud services”. As a result, the $368 billion software industry is changing forever, and packaged software and perpetual license revenue is in permanent decline.

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One of the best parts about buying a new car, other than getting a new car, is that you can get the basic model plus a long list of extras.  Often certain packages have been designed that include the basic model plus a certain set of extras: the “sport” model, the “winter” edition, the “luxury” package etc.  You can start at a lower price point and then just add the extra features you want, without adding or paying for what you don’t want or need.

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A few years back, I found myself with a few colleagues in a bar in Amsterdam having a conversation around the merits of online consumption of music. We were converging to a common view point as to why anyone would want to pay 99 cents for downloading a single song when you could buy the entire DVD in any retail store complete with jewel box and lyrics for $10-15.  Besides, you can always upload songs from CD to the electronic devices; this sounded like the better option to us, a win-win. Proud of our intelligent conclusion over a beer, we were soon up for a rude awakening when the person sitting next to us declared that we are nothing but a bunch of old fellas who don’t know what is going on in the new world.

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