Blog Entry

May 10
2012 

There’s No Debate: ISVs Need to Consider Pricing, Virtualization Options

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.

This opens up opportunities for software companies around the world since it is hard to imagine an enterprise organization going back on the investments they are making in IT. If anything, they want more out of the software and systems in which they are investing and/or have already invested. And that means companies are continuing to scrutinize the costs of using the software.

When I ask our own internal IT group, the following cost issues come up at the top of their list:

  1. Are we over-licensed for software we are using? Not all users are “power users” – why are we paying the same $$ per seat?
  2. The infrastructure to run software is expensive – enter virtualization and cloud infrastructure to reduce cost.

If you are providing software to enterprises, the first issue usually ends up in one of two ways during “renewal” time.  Do you drop your prices to retain the customer, or do you stick to your guns and ultimately end up losing that customer to a competitor a year or two later? You have a third option – offer usage-based pricing.

Whether you offer your solution as an on-premise application or as a cloud application, usage-based, business-intelligence driven pricing models are the wave of the future. Moreover, you will learn that you end up making more money over time, and most importantly, you will have a customer who is just fine paying you that money because they know exactly what they are using. Don’t fight this trend – embrace it.

The second issue is trickier. Virtualization has been around for several years, and most software vendors haven’t been able to deal with it the right way. Solving the challenge of how to license in virtualized environments varies significantly based on type of software. If you were in any fashion charging per CPU, you might as well forget about that model. You have to monetize based on how the software is being used.  For most companies, the savings on hardware and infrastructure due to virtualization far outweigh the cost of paying for software licenses. Think of that as an opportunity and offer business models that are no longer tied to underlying infrastructure.

The other aspect to consider about virtualization is that some enterprises might completely go away from using on-premise software to cloud-based solutions to reduce their total cost of ownership. And, if you are the incumbent and haven’t figured out your own cloud solution, well, at a minimum you better change your software monetization paradigm quickly to match the cloud world: offer subscription-based pricing. Over time, you can build in usage or feature-based schemes as well to prevent further erosion of your market.

Our politicians can fight it out over who has better handle on the economy and job creation but ultimately much of the world nowadays is driven by the private sector, where smart companies making smart decisions create jobs or not – don’t be caught on the wrong side of that “debate”.