The future of Software pricing

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…

Rural onshoring

Rural onshoring seems to be catching up or rather is being promoted by proponents in the US and also in some parts of Europe. These companies provide IT / ITES services from rural locations within their countries. By doing this, they claim they are able leverage the cost factor that most companies cite for outsourcing their work to destinations like India and China.

By locating in rural areas, it is believed that the cost of labour is about 40% lesser than being situated in urban locations. Proponents also say that the employee retention rates are much better.

The very intention of outsourcing (the way it all started) was to save $$$. However, with the current economic scenario there is so much hue and cry about jobs being lost and companies don't want to risk their reputation cutting jobs by offshoring. For these companies, it is a boon if they could find a way save money and also be seen as being responsible by helping rural communities by moving engaging rural vendors. The customers of these services are also happy if they are let to deal with people who not only understand their language but also their culture.

For managers who deal with these vendors, it is all the more better as business trips would be easy, less expesive and shorter. Oh yes, not having to deal with far-away time zones would be so much of a relief.

This being said, people selling offshore services claim that it is not very easy to beat them on the pricing advantage. They are still able to offer services at costs close to 10% of running the same operations in the US! While 10% may be too ambitious a number, there appears to be a definitive cost advantage.

And more recently companies like IBM offered their US employees job options to move to offshore locations instead of being laid off.

At the end of the day, companies have to be profitable. If they are not being profitable, investors are sure to pull the plugs, which would result in more job losses than jobs lost due to offshoring.
The other day I read a question posted on one of the forums by someone who was into rural onshoring in the United States. His question was how to increase media awareness of the advantages of Rural Onshoring, while building support for onshoring. He was keen on promoting the cost advantage.

My take on this would be, irrespective of whether you are an onshore or an offshore company, price alone cannot be a differentiator.

I am quoting an article by Dawna Jones to conclude :

it is hard to escape the conclusion that the world needs a new way of doing
business, one that redefines the basic purposes and responsibilities of
corporations and looks at far more than just the bottom line as a measure of
success or failure.