Thursday, August 11, 2005

Software Pricing

A few weeks ago, an article in the Economist (July 14th 2005) set the software industry buzzing about new business models for software, and given new impetus to discussions of Software as a Service (SaaS).

I did a short piece on service economics for the CBDI Forum (July 20th). Other industry analysts who have commented on this include Britton Manasco (July 15th, August 5th), Phil Wainewright (July 21st) and Sadagopan (August 7th).

The Economist article has been widely read by senior management in the software industry, and there have already been some high-level responses. Jonathan Schwartz of Sun Microsystems sees this argument as a further justification for Open Source – which is of course merely a more sophisticated form of Input-Based Pricing. He looks forward to a world in which software is free. This business model obviously suits those software companies (such as IBM) that make significant amounts of revenue from hardware and/or services.

Meanwhile, Oracle is drawing attention to its experiments in Output-Based Pricing. In a recent interview published in News.Com (July 22nd), Oracle President Charles (Chuck) Phillips stated that "We'd love to get to a mode where we're looking at the number of employees served, the number of checks processed – you name it, some business metric – and take it out of the technology realm and tie our success to their success in terms of business."

In these statements, there is a certain amount of confusion about input-based, output-based and value-based pricing. Even in the software industry, it's hard to imagine that business success is measured by the number of checks processed. (Does Phillips know how many checks the Oracle accounts department processed last month? Does he care?)

Specialist service provider LeCayla offers software companies a managed way of converting to output-based pricing. Software producers embed some coded service calls into the software, which securely pass a defined set of usage statistics from the customer's computer to the LeCayla server. Essentially, this allows a software producer to implement a software meter – which can be based on either input measures or output measures. It also supports policy-based charging, and allows software management on the consumer side to set rules for the utilization of the software. (Rules and policies are written in a LISP-like language, which provides some scope for complexity in their composition.) Although LeCayla has a long-term vision of value-based pricing, it is currently supporting Output-Based Pricing as a step in the right direction.

When I spoke to Conor Halpin of LeCayla about the benefits of metered software, he was eloquent about the possibilities of cost containment and increased control offered to the consumer side. At present, however, LeCayla itself charges the software producer side for its services.

The trouble is that from the software producer side of the fence there may be no compelling reason to switch from input-based pricing to output-based pricing, and there is undoubtedly going to be continued resistance from those software producers who see their traditional revenues threatened by thinking of Software as a Service. Just as many software producers appear to have succumbed to Open Source only after concerted pressure from large institutional users, so we may expect much of the push towards Software as a Service to come from the same quarters.

For a short explanation of the difference between Input-Based Pricing, Output-Based Pricing and Value-Based Pricing, please see my SOAPbox blog. A longer discussion will be published by the CBDI Journal in September, for subscribers only.

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