The subject of software pricing and pricing models has prompted much passionate debate over time and continues to be a hot issue. The incendiary mix is fueled not only by often costly applications and tools, but also by confusing licensing and pricing models. Pricing and licensing has ended up as a very sensitive and provocative issue for vendors and customers equally.

Fortunately for most software vendors, the prices of their products have not had to rapidly tumble down the pricing curve as severely as hardware prices. Falling hardware prices have had some synergistic effect on the cost of software, but application prices have remained relatively high. Just think what the price of some application packages would be today if they truly did follow hardware.

Many still will look at the software market and believe that it is bloated with profit margin. Oracle reported net profits of $501 million on revenue of $2.3 billion in its last quarter. Then there is Microsoft which finished the fiscal year ending June 30, 2000, with $9.4 billion in net profit on revenue of $22.96 billion. Granted, it would be difficult to empirically state these two represent the entire industry; and, admittedly, one good quarter doesn't guarantee another. However, it is evident that software has become a significant ­ if not the largest ­ component in most solutions, with data warehousing and business intelligence solutions being no exception.

Beyond the perceived high cost of applications, it's the way in which pricing models are devised and implemented that causes a lot of the heartburn. There are too many different models being used: named users, concurrent users, server-based, database size, transaction-based, and on and on. The issue of pricing is now so complex and varied that third parties hold industry conferences so that vendors themselves can better understand pricing and licensing. Pricing in the software market has become so convoluted that a whole market niche has sprung up around helping customers untangle the mess. On top of what is spent on the software licenses themselves, customers end up spending millions with outside consultants trying to figure out what their software budgets should be and then renegotiating contracts.

Recently something new was added to the already volatile mix: the Web and e-business. Talk about throwing oil on a fire. Whoosh! Suddenly we have another layer of complexity added to the pricing morass. Customers and vendors alike face new and perplexing questions. How do you actually track the number of users when access is through a Web browser? If that's not enough, let's toss a little more fuel on the fire. How do you price applications that are being hosted by an ASP?

We know that customers are no less confused than vendors about the whole licensing and pricing issue related to the Web and ASPs. Neither are customers united in their requirements, other than, of course, in wanting deep discounts and the lowest price point possible. There is not one pricing model the majority of customers would favor.

Consider these interesting results from one of Survey.com's studies on database pricing. When asked what license/pricing model for databases they preferred, only one pricing model ­ licensing based on the number of servers supporting the database ­ was selected by more than 25 percent of respondents. Only two other license/ pricing models were selected by more than 10 percent of respondents. The results indicate there is no clear majority in the user community. User responses were scattered between 13 different types of pricing models, spanning everything from a per visit or hit model to a monthly rental price per user model.

In the ASP arena, license/pricing models may become just as hot an issue. While there have been statements made by several software vendors that there will be no changes to their models in the ASP environment, it may be prudent for them to closely examine pricing when moving to this new delivery model. A recent Survey.com study of the ASP market showed that nearly one-third of the respondents favored an application-usage pricing model for their hosted databases, while another 24 percent favored a per user license model.

Ultimately, it is not solely the price or licensing model that persuades a customer to purchase an application. We do know, however, that it certainly influences that decision. When all other factors, such as features, performance, compatibility, etc., are relatively equal, the licensing/pricing model itself wields some influence in the decision to buy. At least that is what over 700 survey respondents indicated recently.

What can be done? There is no easy or quick fix, nor is it likely that there will be a single license/pricing model that resolves all the issues for vendors and customers alike. A starting point, however, might be to devise and implement license/pricing models that incorporate the following criteria:

  • Consistency
  • Measurability
  • Predictability
  • Simplicity

I hope that you have enjoyed my inaugural column. I look forward to writing many more. My thanks to Mike Burwen for turning his spotlight to me and to the staff at DM Review for being so welcoming.

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