The licensing and delivery of enterprise software products are making a fundamental shift from traditional up-front fees to incremental, per-transaction, and even success-based pricing. These are popular alternatives especially for small businesses and startups that lack the IT budgets of larger, more established companies. With these models, smaller companies can acquire software for a lower entry cost, paying more as business expands. At the same time, despite the many hiccups experienced by first generation application service providers (ASPs), vendors are also developing evermore creative hosted or managed "software as a service," and other delivery approaches in terms of on-demand availability, appropriate pricing models, etc.
Those who have long followed IT will likely see this as a sort of a "back to the future" phenomenon—a return to the old concept of computing service bureaus, which emerged in the late 1950s. At the time, computers were exorbitantly expensive and beyond the reach of all but the largest companies. To combat this problem, larger computer giants such as IBM, Burroughs, Univac, and Control Data Corporation began to set up service bureaus to sell time-shares for computer use. Today, given the decreasing and affordable prices of hardware, the major predicament is now with enterprise software applications, such as the pesky enterprise resource planning (ERP), product lifecycle management (PLM) or customer relationship management (CRM). While smaller companies may be able to afford the necessary hardware, these systems are often too expensive and intricate for small companies to govern. They cannot handle the IT staff and infrastructure required to support such major enterprise application.
Consequently, recent moves by the most prominent market players may be another sign of enterprise applications evolving into "software as a service" and related hosted/managed models. The market may be experiencing the beginning of the end of user-based licensing that is hosted on the customer's premises and constrained by a time period and product version. Namely, the majority of business application software vendors generate most of their revenue by selling software licenses based on the number of named or concurrent users or seats. Sometimes this is on a per module basis, but is often based on an unneeded "wall-to-wall", "all you can eat" functional scope. Other revenue generators include accompanying implementation and post-implementation service, support and maintenance priced as a percentage (and more often multiples) of these software license fees.
However this model may be wearing out its welcome on both the vendor and customer side. For one, it tends to be cyclical. Vendors first sell their present product versions into the market, and then sell subsequent upgrades. Logically, sales revenue should peak after each major upgrade, and then drop until the next one (on average of every 1218 months). This creates a cyclical, erratic revenue stream, which, in turn, has ramifications for business performance, such as cyclical, volatile stock prices for public vendors.
On the other hand, many user companies are unhappy with the rigidity of the model, especially in terms of the tiresome and endless upgrade process; maintenance fees that keep creeping up; and non-standard pricing that calls into question the deal they got particularly when paying for functionality that will not be used any time soon. It becomes analogous to buying a lifetime supply of already-brewed coffee all at once. It will only languish on the shelf and go rancid. Why not approach software applications la carte: get only what you want and minimize waste.
This is Part One in the Trends in Delivery and Pricing Models for Enterprise Applications series a four-part note.
Part Two will discuss utility computing.
Part Three will detail the effect of the transition on vendors.
Part Four will cover software as a service business model and make user recommendations.
Different Pricing Options
Since fewer than one in four enterprise application projects deliver workable solutions that last six years or more, clients are increasingly wary of committing huge sums of money before obtaining a measurable return on investment (ROI). Moreover, to level revenue streams, vendors have been looking for different business and pricing models for on-premise and hosted software. One emerging pricing model is based on whether the user is a power or a casual user. This stratified pricing model promises that users will pay only for what they use. A driving force behind this is the Internet, since it makes software accessible to a new realm of casual users who become like authorized visitors to a company's secure Web site, may they be remote employees or business partners.
Another pricing option variation is based on what users actually use and not what they can get—the so-called "pay-asyou-go" option. Typically, enterprise software comes with switches that can be set based on need. These switches are set at the "software factory" to limit the available functionality, as outlined by the contractual agreement. For example, users in a small or medium enterprise (SME) can have multicurrency, financial consolidation, or standard or actual costing switched on or off. If, at a later time, the company decides it needs a particular functionality, such as actual costing, to be switched on, it will have to pay for it to be enabled. Arguably, through this model, SMEs that use less functionality will need less support.
In addition to the stratification and pay-as-you-go models, some prominent companies are trying to alleviate the upgrades conundrum. For example, Microsoft is attempting a model where customers are guaranteed upgrades during the licensing period. Yet, while this model can stabilize a revenue stream, it does little to break the dreaded upgrade cycle, since an upgrade's protracted postponement can put it outside of a license period making it a chargeable item.
Ironically, the major benefit of this model to the customer is the free upgrades, but, since implementing upgrades incur other related costs, any upgrade must have enough added value to justify its implementation. Consequently, the new features may be of little or no value to some customers and they will elect not to upgrade even if it is free of charge. For more related information, see The Old ERP Dilemma—Should We Install The New Release?
The widespread use of personal computers (PC), the Internet, and the ensuing Web-based applications have especially impacted how business applications are sold and delivered. The development of Web-based applications has decoupled the user interface (UI) from the business application logic and its underlying software and hardware platforms. Now, for the cost of a mere Internet connection, any user working at a PC with a Web browser can basically access a variety of business applications that are run on different software or hardware platforms from any number of different locations. As a result, enterprise application vendors have begun to change their business models from traditional, on-premises software license sales to delivering software as a service.
SOURCE:-
http://www.technologyevaluation.com/research/articles/trends-in-delivery-and-pricing-models-for-enterprise-applications-pricing-options-17867/
Those who have long followed IT will likely see this as a sort of a "back to the future" phenomenon—a return to the old concept of computing service bureaus, which emerged in the late 1950s. At the time, computers were exorbitantly expensive and beyond the reach of all but the largest companies. To combat this problem, larger computer giants such as IBM, Burroughs, Univac, and Control Data Corporation began to set up service bureaus to sell time-shares for computer use. Today, given the decreasing and affordable prices of hardware, the major predicament is now with enterprise software applications, such as the pesky enterprise resource planning (ERP), product lifecycle management (PLM) or customer relationship management (CRM). While smaller companies may be able to afford the necessary hardware, these systems are often too expensive and intricate for small companies to govern. They cannot handle the IT staff and infrastructure required to support such major enterprise application.
Consequently, recent moves by the most prominent market players may be another sign of enterprise applications evolving into "software as a service" and related hosted/managed models. The market may be experiencing the beginning of the end of user-based licensing that is hosted on the customer's premises and constrained by a time period and product version. Namely, the majority of business application software vendors generate most of their revenue by selling software licenses based on the number of named or concurrent users or seats. Sometimes this is on a per module basis, but is often based on an unneeded "wall-to-wall", "all you can eat" functional scope. Other revenue generators include accompanying implementation and post-implementation service, support and maintenance priced as a percentage (and more often multiples) of these software license fees.
However this model may be wearing out its welcome on both the vendor and customer side. For one, it tends to be cyclical. Vendors first sell their present product versions into the market, and then sell subsequent upgrades. Logically, sales revenue should peak after each major upgrade, and then drop until the next one (on average of every 1218 months). This creates a cyclical, erratic revenue stream, which, in turn, has ramifications for business performance, such as cyclical, volatile stock prices for public vendors.
On the other hand, many user companies are unhappy with the rigidity of the model, especially in terms of the tiresome and endless upgrade process; maintenance fees that keep creeping up; and non-standard pricing that calls into question the deal they got particularly when paying for functionality that will not be used any time soon. It becomes analogous to buying a lifetime supply of already-brewed coffee all at once. It will only languish on the shelf and go rancid. Why not approach software applications la carte: get only what you want and minimize waste.
This is Part One in the Trends in Delivery and Pricing Models for Enterprise Applications series a four-part note.
Part Two will discuss utility computing.
Part Three will detail the effect of the transition on vendors.
Part Four will cover software as a service business model and make user recommendations.
Different Pricing Options
Since fewer than one in four enterprise application projects deliver workable solutions that last six years or more, clients are increasingly wary of committing huge sums of money before obtaining a measurable return on investment (ROI). Moreover, to level revenue streams, vendors have been looking for different business and pricing models for on-premise and hosted software. One emerging pricing model is based on whether the user is a power or a casual user. This stratified pricing model promises that users will pay only for what they use. A driving force behind this is the Internet, since it makes software accessible to a new realm of casual users who become like authorized visitors to a company's secure Web site, may they be remote employees or business partners.
Another pricing option variation is based on what users actually use and not what they can get—the so-called "pay-asyou-go" option. Typically, enterprise software comes with switches that can be set based on need. These switches are set at the "software factory" to limit the available functionality, as outlined by the contractual agreement. For example, users in a small or medium enterprise (SME) can have multicurrency, financial consolidation, or standard or actual costing switched on or off. If, at a later time, the company decides it needs a particular functionality, such as actual costing, to be switched on, it will have to pay for it to be enabled. Arguably, through this model, SMEs that use less functionality will need less support.
In addition to the stratification and pay-as-you-go models, some prominent companies are trying to alleviate the upgrades conundrum. For example, Microsoft is attempting a model where customers are guaranteed upgrades during the licensing period. Yet, while this model can stabilize a revenue stream, it does little to break the dreaded upgrade cycle, since an upgrade's protracted postponement can put it outside of a license period making it a chargeable item.
Ironically, the major benefit of this model to the customer is the free upgrades, but, since implementing upgrades incur other related costs, any upgrade must have enough added value to justify its implementation. Consequently, the new features may be of little or no value to some customers and they will elect not to upgrade even if it is free of charge. For more related information, see The Old ERP Dilemma—Should We Install The New Release?
The widespread use of personal computers (PC), the Internet, and the ensuing Web-based applications have especially impacted how business applications are sold and delivered. The development of Web-based applications has decoupled the user interface (UI) from the business application logic and its underlying software and hardware platforms. Now, for the cost of a mere Internet connection, any user working at a PC with a Web browser can basically access a variety of business applications that are run on different software or hardware platforms from any number of different locations. As a result, enterprise application vendors have begun to change their business models from traditional, on-premises software license sales to delivering software as a service.
SOURCE:-
http://www.technologyevaluation.com/research/articles/trends-in-delivery-and-pricing-models-for-enterprise-applications-pricing-options-17867/
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