With cloud computing changing the landscape of software monetization, Amy Konary, Research Vice President of IDC’s (News - Alert) Software Licensing and Provisioning program in a recent interview with TMCnet shared her thoughts on the significance of global pricing strategies. Since cloud has risen in adoption, she said IDC has seen an accelerated trend toward subscription-based models.
“When it comes to cloud, the way you primarily pay for cloud computing, that’s going to be a subscription model,” Konary explained. “Another element that cloud is bringing to the table is that all-important transparency with pricing. It’s much easier to figure out what a cloud service might cost upfront as opposed to if I wanted to buy an SAP (News - Alert) [or similar type] application, especially if I am going to run it on-premise.”
Cloud has accelerated the demand for usage-tracking transparency from end users. As a result, software publishers must take into consideration how to track application usage at a granular level and then determine when and how to expose users to that data.
“There needs to be some technology in place because tracking [licenses] manually is not something companies want to be doing,” Konary said. Software publishers need a easy, automated way to track license details, entitlement activations and product usage right down to the feature level.
However, software policy in terms of tracking usage compliance is one path where Konary sees ISVs often take the wrong direction. Software publishers are usually hesitant to build usage-based billing models or to expose end-users to usage data out of fear that they will see a drop their revenues. For example, if an end-user is under the assumption that all users are active once they have activated their software, but then see a report that more than half of their users log in less than one a month, that could fuel a decision to reduce the number of licenses purchased for the application in question.
When asked about this phenomenon, Michelle Nerlinger, Director of Marketing for SafeNet (News - Alert) indicated that SafeNet’s customers are seeing the opposite effect. Nerlinger noted that, “Software publishers have every reason to be nervous about moving from traditional lump-sum pricing models to subscription models – it will change the flow of their revenue dramatically. Rather than getting paid the full value of a customer contract up front, the revenue becomes staggered and more predictable. We have helped many customers make the transition from perpetual and other more traditional licensing models to pre- and post-paid usage-based models and very rarely have we seen an overall decrease in revenue.” She added that, “In fact, we have seen just the opposite – most customers have seen that over time their application was being used much more than they anticipated and revenues actually increased within key accounts, and up-selling and cross-selling became a much easier task.”
When asked to further discuss tracking best practices, Konary commented, “One mistake I see software publishers make is creating a software policy that is difficult for customers to follow. The ISV can track usage for billing purposes, but there is no mechanism for customers to track or report on it,” Konary said. “This happens across the software industry. If you are tracking per user, your strategy is complex. If you don’t have a mechanism in place for customers to track their usage you are never going to be able to make them happy. Tracking is stressful.”
However, on the flip side, allowing for too much flexibility might cause ISVs to sell themselves short, which can result in lost revenue after a software usage audit.
“Too much flexibility puts them in a difficult position. Most software companies realize that,” Konary said.
For example, they might be asking how to add simplicity, but there is no need for them to offer three different pricing schemes or provide 60 definitions of what a user is, she said.
In summary, the software industry it is not that old compared to other industries. Forty years ago, it was not as an important part of our lives as it is today.
“One of the things that we’ve seen in working with software companies under 10 years old is that they are focused on growing revenues really quickly in the beginning. Either they wanted to go public or get funding right away. But they did that at the expense of having a solid structure – there’s been a lot of smoke and mirrors from the sales perspective,” Konary said.
Konary likened today’s software industry to the “Wild West.” “It’s an old ghost town where the front façade on the street looks good, but if you walk around back, it doesn’t look quite as good,” she said. The same applies to having proper support for a monetization strategy.
“Things look really pretty from the outside, but in order to compete with a more established industry they might do that at the expense of a structured monetization strategy,” Konary explained. However, looking inward, there might be lot of spit and bubble gum holding it together.
“It’s not the sexy stuff that management wants to focus on in fixing the guts of a software company. It’s not a huge, sexy big type of reward kind of a thing,” she said. However, “it’s important to fix it, because if you don’t you can have a ghost town. You will cripple your ability to successfully compete.”
Konary will address this topic at the upcoming SafeNet LicensingLive! Event being held Oct. 2-3 in San Francisco. Konary will speak at the “The New Look of Software Monetization” session.
Edited by Peter Bernstein