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.
At a recent conference our CEO asked: “What’s the average price of software?”
An interesting question. I started thinking about the mix of consumer vs enterprise, the uptake of subscription based and usage based pricing, and a host of other factors that left me spinning to the point I concocted a number way off the mark. I’ll preserve a little dignity and not share my answer, but ask that for a moment that you ponder the same.
I suppose the title of this article may provide a clue. So do you have your guess?
If you live in US or follow the news about US, you know that we are in middle of a political election season. You can’t go a week without watching the back and forth between Presidential candidates over topics that range from relevant to mundane, game-changing to ridiculous. One of the more serious topics (and probably at the top of the voters’ mind) is job creation, or the lack thereof. The US economy is growing but job growth is not keeping pace. At the heart of the issue is productivity: when the chips were down during the peak of recession, most companies learned to be very efficient. That is, they learned how to get more out of the resources they have. One of those efficiencies is increasing use of IT to improve productivity of employees. You could say job growth has given way to use of more software systems and tools.
Software pricing and packaging is an art form and perfecting it is an ongoing battle. Add cloud services to the mix along with your on-premise offerings and you have a recipe for disaster. I have spent the last two years working with ISVs who are in the midst of planning and migrating all or a portion of their product portfolio to the cloud. A significant obstacle is how to price and package their offerings to build a customer base, prevent cannibalization, and ultimately increase profitability. I have decided that their stories and the successful approaches are certainly worth sharing!
Frequently I have the opportunity to discuss “software licensing costs” with ISV’s and device manufacturers in our industry. I always find it to be an intriguing discussion, and almost universally it seems that these companies view licensing as a necessary evil, not as an investment (let alone a strategic investment!). While there are multiple reasons why this could be (think of purchasing organizations and how they are measured), part of the equation undoubtedly has to do with the lack of concrete ROI metrics that are available around this technology, and the management of licenses and entitlements.
How do you know how much you are losing? How much is due to piracy? How much is due to unintentional piracy by organizations that want to be compliant, but aren’t due to a lack of enforcement? All of these metrics seem to be based in the psychology of perceived loss, as opposed to perceived opportunity.
One of the inherent dichotomies for software vendors exploring new pricing models is: Who do you talk to? The common response is “Discuss this with your existing customers – they know best” There’s only one problem with that. Your existing customers have already most likely validated your current licensing processes – via the act of purchasing your software. To put it another way, when they looked at your pricing and licensing models they most likely found them to be agreeable enough (or at least not a big enough impediment) to moving forward.
The risk then as you explore new software licensing and pricing models is that you poll your existing customers only. While they’re an important constituent they should not be the only constituent. You need to look at the potential customers who did not buy your solution. Find out why they decided to go in another direction.
At a recent event for SafeNet Amy Konary made an interesting comment based on analysis performed by IDC. On average end users of enterprise software felt as though they utilized only 30% or so of the availability of that application. That is, they were not getting benefit from up to 70% of the software’s features and functionality. (Amy please forgive me if I don’t have those %’s exactly right but it was in that range) The conclusion reached from this observation is that software should be better dissected so that people only pay for the pieces they want.
The conclusion seems logical enough but I’ve struggled with it ever since. Firstly, if it’s true, why have rational economic buyers still purchased software en masse? Many financial analysts believe that software spending was one of the first sectors to bounce back from the recent economic turmoil.Secondly, are there any other normally functioning markets that have similar traits? Lastly, why do end users on average only use 30% of the available capabilities?