March 10, 2010 – Software customers believe today's pricing and packaging models force them to buy more software than they need, and the result is a market push toward usage-based pricing models.

It’s not clear what impact of usage-based pricing models will have on the economics of the software industry, according to a new study from market research firm IDC (“Pay-per-Use Software Pricing – What You Need to Know Before the Meter Starts Running”). But a number of trends are driving the pay-per-use pricing model forward.

While customer interest in pay-per-use pricing is not a new phenomenon, the economic climate, expansion of software as a service offerings and the advent of cloud computing are accelerating this trend. Customers want software pricing models that allow them to pay only for what they use while maintaining an even distribution of costs over time, according to the survey.

Companies feel they are forced to buy more software than they need, because the predominant way to license software has been for potential need, said Amy Konary, research director software pricing, licensing and delivery for IDC. “The overall sense that traditional models need to change and they need to better align with usage is universal.”

There are two primary motivators from a user-perspective for the pricing model shift, according to Konary. The first is the premise that you only pay for what you are going to use. The second is the ability to use the pay-per-use function as tracking mechanism for understanding what a company actually makes use of.

These concepts are mutually exclusive, said Konary. But the combination of tracking usage to better align purchasing with need and a pricing model that actually aligns with usage creates the ultimate way to address excess unused software. “Short term, it will reduce the total money spent on software. The long term impact is that companies will use software more. With more visibility into software, you can plan better and make smarter decisions to purchase more of what you are actually using.”

Vendors also see the value for customers, but continue to ask how a pay per use model is good for them, according to Konary. Konary’s answer is that there are benefits to coming out from behind the proverbial curtain.

Equating the vendor atmosphere to the Wizard of Oz, Konary says that software companies are asking customers to “pay no attention to the man behind the curtain,” or rather, pay no attention to the fact the companies are paying for more than what they need.

One benefit for vendors is that frequent payments motivate use, according to Konary. “It’s the psychology of the gym membership. People who pay $50 a month, rather than $600 in December, go to the gym more frequently because they are making a decision every month to pay. And, the person who spent $600 is a lot less likely to renew in the end. The same is true with software. With this change, you end up with happier customers and more reliable customers.”

Additional benefits for the vendors come in the form of increased insight. “Vendors know what they sell, but they have no idea what customers actually deploy. And a layer beyond that, they don’t know what the customers are using,” said Konary. Usage-based pricing models can prevent companies from making costly mistakes, provide them with insight about where customers are today and assist in determining customer needs for the future.

In the meantime, software vendors need to focus on a series of issues to prepare the way for pay-per-use and utility licensing options, according to IDC’s report. Those issues include selecting resource utilization metrics that make sense in the context of software business value; providing complete and detailed billing summaries that eliminate the need to collect usage information; providing the software architecture and delivery methodology to enable fast and flexible deployment of software resources to meet changing business needs; and being prepared to offer a portfolio of licensing and delivery approaches.

“There needs to be a correction in the industry, and vendors can [choose to] meet that head on or be dragged or forced there,” concluded Konary.

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