Blog Entry

Aug 5
2010 

Software Monetization – Pay as you go or Lump Sums?

You can’t be in a leadership role in the technology industry and not be involved at some level in the debate between pay-as-you-go and lump-sum type revenue models.  Without question – lump-sum dominates the technology market space – for software – and for features-on-appliance (i.e. software).  But the emergence of SaaS has opened up the debate.

The debate is quite heated.  Opponents of pay-as-you-go say things like “it’s too complicated”, “enterprises won’t go for it”, “software vendors can’t convert to it”, “it’s a fallacy to think that SaaS uses pay-as-you-go”.

Proponents say it’s one of the “core ingredients of SaaS”, “people will adopt it”, “technology can solve the complexities”, “shelfware is a concern”, “it drives competitiveness and flexibility”.

Within SafeNet, our Sentinel Software Licensing & Entitlement Management BU members are proponents of the P.A.Y.G. models.  We think that startups will adopt it because it creates a differentiator.  We think that enterprises will want a mix of lump and P.A.Y.G. to help manage costs and planning and we believe that it can lead to more equitable measures and customer/vendor relationships.  We don’t believe that established technology vendors can afford to ignore the model – and that at some point – some efforts are going to be required to enable it.

We surveyed many technology companies globally – and their customers.  While all regions had slightly different responses – without a doubt interest in developing services from the vendors and buying services from the customers is high on everyone’s mind.

This month we kick-off private Beta of our new service www.sentinelcloud.com.  Sentinel Cloud Services allows for simplified measurement and control of your software or service – so that you can easily provision, meter and ultimately bill for your product or service in the PAYG model.  With that in place we plan to build on top to allow companies to manage a mixed portfolio of offerings – so that you can easily manage customers who receive a mix of products and services from you – PAYG or Lump or both.  If you want to be involved – please sign up and apply.  We are controlling initial participation – and will broaden the beta out in October – so if you don’t get in the first round – please hang on a little longer.

Our approach is a very open and SaaS/web friendly one.  We have API’s for your products and services – and API’s to link your existing systems and services in to ours.  Sentinel Cloud Services allows for simplified measurement and control of your software or service – so that you can easily provision, meter and ultimately bill for your product or service in the PAYG model.  Our overriding goal is to make it low to zero touch on your products and services after deployment – so that you can add/change/delete and manage different offerings without recourse to R&D.  With that in place we plan to build on top to allow companies to manage a mixed portfolio of offerings – so that you can easily manage customers who receive a mix of products and services from you – PAYG or Lump or both.

We look forward to seeing you in the cloud.

  • http://drewdillo.net Drew Dillon

    Hi Chris,
    Interesting stuff, I signed up for the beta. I’ll be interested to see how the myriad lump sum estimations translate into a PAYG system.
    Examples: I manage software that is licensed based on seats, operating systems instances (IPs, really), volume of data (transactions) or there’s Oracle where they license seats, processors, users, etc.
    There are also a lot of products coming out right this very second where folks are thinking: this will make a great SaaS offering in version 2.0. It’s an interesting problem determining the value of these solutions, “I think I know what this is worth lump sum, but how to I monetize it and various sub-components of it in a subscription model?” How can I prepare for one without undervaluing or overcharging on the other?

  • Chris

    Hi Drew
    you ask a very insightful question – and its one I have heard a few times – form customers and other professionals in this industry. The answer, as you can imagine, is complex.
    If you are an established provider of solutions moving to SaaS – a concern is self-cannibalization. If you are a start-up… then attractiveness, competitiveness and profitability are the key concerns. It should worry the industry as a whole that the #1 motivating factor for customers to move to SaaS (and, incidentally, Virtualization) is to save substantial money on the associated licensing fees. Clearly if everyone moved to SaaS tomorrow – the dynamics of the economics of the entire software market would change dramatically.
    Of course… that won’t happen. There is still substantial resistance in parts of the customer base to switch – and… over time… the real price/cost of SaaS will rise (or even exceed) those of traditional models.
    I gave a talk last year asking publishers why their customers thought moving to SaaS and virtualization technology would save them licensing fees? After all – the software in either case is providing the same value and the cost to produce it didnt change. What changes are the distribution and service costs. There is not enough change there to fundamentally alter the economics of the software industry.
    So… what is really happening is good old-fashioned competition. Start-ups enter the market with competitive features, a new distribution model (SaaS), a new monetization model (subscription over license) and… shocker… a lower price.
    How does an established vendor respond? Obviously providing SaaS is an important component to supplement and augment the on-premise offering. The fees collected for the service should not be the primary marketing tool for these new services – in other words – the as-a-Service nature on it’s own needs to drive additional value to the customer. There are many dimensions here – lower operational costs/headaches, global access, platform independence and new features derived from the underlying connectivity. Your existing customers may well continue to buy your products under their old scheme – and treat your as-a-Service additions as new and welcome features.
    For new prospects however – just having the service components will not be enough – and you will need a new monetization model to accompany it – and defeat your less-restricted start-up competitors. So your price… simply… has to be competitive to the alternative. There are, of course, many dimensions to competitive pricing – and vendors should always associate a premium with their legacy, brand, referenceable base, deeper feature set etc…
    I was asked once how a company could move from a traditional license model to a pay-as-you-go model. The more I think about that question – the more I think it is the wrong question. I think the right question is how can a company augment its monetization offerings with PAYG. Determining the right metric is hard… but a good marketing team should know where its value lies – start by making their best guess… and be prepared to change it as you learn and gain more experience.
    With sentinelcloud.com you will be able to make your best guess and change it… lots of times if you want. You can even assign different metrics on a per-user basis if you wish. We may not necessarily recommend that – but the point is that we are moving to a world where the monetization model does not associate with the product or service – but with the customer – allowing companies and customers to find and settle on the metrics that matter most to them.
    Chris