Enterprise software licensing: simple?
Submitted by Hans van Nes on Fri, 21/01/2011 - 17:00
I have been in the enterprise software license business for quite some time and I always found pricing and licensing the most time consuming element in doing business. Designing the right pricing model can take for ages and probably the next opportunity will require a tailor made solutions anyway. Via our Solution Brokers activities we have encountered the most creative and complex variants of licensing you can think of. Did we get more practical about this over the years? A walk down memory lane.
Component pricing
It all started with components: just order and pay for those element you are using. Sounds so logical but it becomes complicated when to define and administer how many client & server modules, production & development environments, test environments, sandboxes and what have you are needed. Add a few connectors left and right and you end up with a multi page order form and tons of "do we need it?" discussions around the yearly support fee invoice.
Platform pricing
A first step to simplify was attempted by grouping all required elements around a technical platform: all Windows software or all SCO-Unix. Especially handy in the days we had many mainframe and distributed propriety platforms in our companies. It solved some of the technical discussions but triggered other ones on pricing like why platforms were equally expensive but different in functionality and usage. And, for smart organizations, this was a trigger to standardize.
Site License
An all-you-can-eat license for your whole organization. Of course makes sense from the perspective of the vendor because above a certain threshold the costs of selling yet another license are outweighed by the certainty of guaranteed maintenance income. But it is only a solution for very large organizations who really will use all the software and can afford it. Also these licenses are hardly never completely unrestricted. Most have clauses that e.g. limit usage in case of mergers and acquisitions.
User based pricing
Believe it or not, we do IT for the sake of our the users. So why not forget technology and just look at them? Throw every technical component that you can think of in a bucket and convert it into a price per user. Sounds easy enough but at once triggered another issue: what is a user? Anybody with a user-id? Or the ones concurrently using an application? And, to make it interesting enough for the vendors, of course with a step-chaired pricing model depending on the number of licensed users (…."I know that you don't need 51 users but above 50 the price is lower…."). Above all: usage per user can differ quite dramatically from all day long active use to hardly ever (or even never but automatically subscribed through active directory rules).
Per use pricing
No, it's far better to go for the actual use of the software. Thus "per tick" models were designed in analogy to the way telephone calls are charged. Initially the purchasing department loved it: no large upfront investments, only €0,001 per tick and periodical bills afterwards. It works for both owned software and SaaS models. And in the end the financial guys had to pick up the pieces. As we all know from our telephone bills: they are always higher than expected, costs vary for different elements like internet usage, calculations are rounded to whole minutes, etc.. Of course we can introduce subscriptions or pre paid options to make cost more predictable. But more predictable means mitigating risks for all involved and thus more expensive.
Open Source software
Open source software is the answer: for free! Well, sort of. First, apart from real commodity solutions, there is and will not be a large offering of enterprise solutions that are offered for free. But assuming you find one, the involved effort to create and maintain the intellectual property will come at a price. Yes, you might get the source of the solution together with the usage right for free but then you have to invest more to maintain it yourselves. So maybe a partial solutions for commoditized software but not as a general model.
Packaged pricing
Interesting option: pricing based on available functionality per user. No discussion on underlying technology, type of usage and amount of usage. And support options are included for the chosen level. Typically marketed in terms of Basic, Gold & Platinum subscriptions. Up-and downgrade options possible to adjust to changing circumstances. Normally a price per period upfront. More transparent cost wise than pure per use models. Works very well for business-to-consumer type of offerings but I have not seen this a lot for enterprise software yet.
The above are just the main types I came around. Many sub-variants and combinations exist. To me there is no such thing as the perfect enterprise software licensing model. All variants have larger or smaller backdrops given a specific situation. Usage type, usage volume, predictability, flexibility and sheer affordability, both from the perspective of the vendor and the user, need to be considered. It will largely remain up to the creativity of the commercial people involved what a best solution for a given situation will look like. The tendency towards packaged type of solutions is, to my opinion, from a manageability perspective inevitable. My next variant to try out: price per business transaction!
As always comments welcomed.
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