Thursday, September 13, 2007

Apps Strategy: SaaS Pricing Models Challenge the Status Quo

A dichotomy of software licensing and pricing philosophies has emerged. On one hand, software titans such as Oracle and SAP continue to shift the pendulum towards usage based metrics for its largest customers. These options represent metrics such as revenue and industry specific models that seek to extract a “fair value” for their contribution to an organization’s success. On the other hand, Microsoft and a host of vendors like Epicor and Sage serving the SMB market continue the push for usage based models including concurrent user which seek to limit ownership costs to the user level. SMB’s find favor with this model because it creates an apparent aura of predictability and “fixed nature” to license costs. As SaaS options gain in popularity and familiarity, I predict the pendulum will shift again (for large enterprises) because:
  • Simplicity of SaaS model puts the focus back on user based pricing. Cost per user per month highlights the elegance of simplicity. Business leaders easily understand pricing by users and not by revenue or their business success. Why should you pay a software vendor more for your success?
  • Inclusion of maintenance, support, and upgrades raises the bar. Unlike traditional models which tack on 15 to 25% in annual maintenance costs and may or may not include the apps and technical foundation upgrade, SaaS pricing eliminates this level of complexity. Users neither worry about the cost of upgrade nor worry about the testing and certification costs.
  • Current systems nearing the end of their life-cycle provide enterprises a fresh start. Many ERP systems installed pre-Y2K are now coming up on replacement. Enterprises emerge from harsh lessons, as they have paid for maintenance of unused licenses (i.e., shelfware), suffered undefined maintenance fee increases, and lost functionality credit for future releases. As companies begin their vendor selection processes, they do not want to repeat the same mistakes. SaaS pricing simplicity allows them to limit their risk while gaining the benefits of rapid deployment.

The bottom line

Though the simplicity and elegance of the model may not apply to all scenarios, prospects and customers should consider how to apply SaaS pricing models to traditional licensing and pricing contracts. Armed with this metric, a lot can be gained from limiting the cost of IT to the number of users. And thanks to SaaS, the only thing that matters is cost/user/defined time period.

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2007 by R Wang. All rights reserved


vs2470 said...

When you say the pendulum will swing again, do you mean that larger organizations will want to use SaaS.

One would think that large companies would prefer committed exclusive services given their fixed costs are disctributed over a larger customer base

R "Ray" Wang said...

Vs2470 - very great point! Let me reclarify in the posting. -R

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