I found an interesting article on Accenture (edit: no longer online, unfortunately) about how enterprise software developers are finding it increasingly more difficult to grow their business in the age of robust, feature-rich online applications.
To summarize, the article contends that in order to survive software manufacturers need to think about offering a broader set of “on demand” applications, rather than developing ever-more ‘niche-application’ offerings. In tandem, they need to reconsider the way that they set software pricing.
New Customer Behaviors Call For New Software Pricing Models
I have a few friends who work in industries where, just a few years ago, the norm was for companies to spend hundreds of thousands of dollars to buy software. Then to pay anywhere from 15% to 21% of their original purchase every subsequent year in order to continue to receive software updates, plus online and telephone support. My friends tell me that finding new clients every year who are prepared to purchase software in this way is getting harder and harder.
Well, that’s hardly a ground-breaking observation, is it! Anyone who’s been watching how consumers have been buying software for the past 5+ years could have seen the writing on the wall.
The days of charging mega-bucks for software applications, whether packaged off-the-shelf-type products or more enterprise-deployed systems, have peaked. Even at the desktop level, whether we’re talking about SMEs or even consumers, there are ever-more applications that offer the features that people need, but at a radically-different software pricing structure.
The applications are either available as a free-to-download package to install on your computer (such as Open Office) or as hosted applications that are either free (such as Google Apps) or charge you in a similar way to how you pay for your mobile phone calls (e.g. Salesforce.com or SunGard).
It’s Not About You. It’s About Them.
But even as we get away from the large, super-specialist vendors, we can see there’s a clear sea-change on the way software is being purchased. Adobe do it, with their Creative Cloud suite. Microsoft do it with Office365. Both these software suites crossover from what we can term predominantly consumer-targeted, to prosumer and even professional applications. Companies prefer to buy their software per month. From a accounting standpoint it allows them better cashflow management. From a commercial standpoint it offers them more flexibility and scalability to address the peaks and troughs that every business endures.
There’s only one reason why these so-called “enterprise” software houses haven’t made the evolution to a more customer-focused pricing model: they want to maintain the status quo. They don’t want to upend their business models, are too entrenched with existing methodologies, and (perhaps most of all) fearful of change.
New Software Pricing Will Come – Markets Will Decide
But change must – and will – come. Adobe were the first major vendor in the creative industry to move to a subscription model. Companies such as us used to have to spend tens of thousands on software licenses with Adobe every time a new version of PhotoShop, Illustrator, InDesign, or After Effects was launched. Today, we spend a few hundred bucks every month.
Another indirect benefit from the subscription model of software pricing as been regarding platform. 10 years ago the pain involved with moving from, for example, a Mac to a Windows-based computer wasn’t just with learning a new operating system. You had to fork out all over again for new versions of the software you were running. Today, moving computer platforms is just a case of ‘de-authorizing’ one machine and ‘authorizing’ another. Often, the vendor doesn’t differentiate software licenses according to platform. In fact, why should they?
Like so many other things, the market will decide. Software houses need to break with the traditional approach to pricing and usage if they are to tap into new growth opportunities – let alone minimize attrition of their current user base. If they choose not to, it’s just a matter of time before their businesses become as niche as their products.