Value based pricing appears to be the road that IT product vendors will have to take in the near future.
Up until now, when it comes to pricing, software product companies have been calling the shots. With the global meltdown taking its toll, customers have gone into a full fledged cost optimisation exercise. Vendors no longer command the pricing that they once used to. So far, the cost of a software product cannot be fully quantified (or maybe I don't know how!). The software is developed once. The marginal cost of delivering it to multiple customers is zilch (Oh yes, there is the marketing and sales cost). I am not getting into the nitty-gritty of the ROI yet. This gives enough leeway for software companies to price their products however they wish and more than enough flexibility in negotiation. Seventy percent margins are not unheard of! Customers are now questioning the value of what they pay.
With major software vendors like IBM and Microsoft are experimenting subscription based pricing and rental pricing, it is only reinforcing that things are changing fast.
If a customer is going to use only 30% of a $1 million product, then why pay so much? Or rather if only a portion of the workforce would use it at any given time, then why pay for additional licenses?
In the world of value based pricing, customers ask vendors to “throw more meat into the game”. For example, instead of a fixed license cost, a dynamic license cost based on usage at any given time. A call centre running a 100 seat operation during the day and a 50 seat operation during the night will only pay for 50 licenses that it uses during the night and not a flat 100 license fee.
It will be interesting to watch how the story unfolds moving forward…
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2 comments:
Nice one...
Many companies have "Transactional Pricing" models in play for a few years, but the downturn has really put the focus on "Value for money"!
With the internet maturing, availability of more bandwidth, improved and reliable security - SaaS (hosting services on the Web) is becoming more and more popular and the TCO (total cost of ownership) comes down significantly! This offers a level playing field for many small-mid sized companies and with further innovation, who knows where the limit is??!!
That is true Anil. I think its time that the field will be re leveled !
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