Pricing Saas Models: Perceptions of Business Service Providers and Clients

Article excerpt

The paradigm shift in delivery of software applications from a shrink wrapped / licensed form to a more end- user friendly 'service' was fuelled by the opportunity that the Small and Medium size Businesses (SMBs) created. It created a way to deliver the existing software applications to new markets or serve existing markets in a new cost effective way. The bottom line being, customers who do not have the expertise or capital budget to purchase, install, and manage applications, can subscribe to hosted services for a recurring fee. This model came as a fresh dose of energy to an otherwise matured model, but brought with it a lot of complexities which a service provider will have to address. Key concerns include pricing of such pay-per-use models. The paper has attempted to address the concerns of the service provider, while pricing such services, by delving deep into their internal perceptions as well as extraneous intended end -user perceptions.

INTRODUCTION

The delivery of software services has come a long way since its initial formative years. For very long software applications were delivered shrink wrapped and purchased by paying a one time license fee. This meant that clients, who want to scale up the usage of the software they bought, paid a high cost for the scale up. It meant that as the number of users increased, clients paid more license fees. On the other hand clients may want to use software when they need to and not all the time. Which meant a whole day's license or a month's license will serve as an idle one with money locked in for a client, not providing need based value. It appears that there was a need to have a different definition of usage and price of usage of software applications. In a fiercely value based competitive environment, the one time license has proved a failure for client usage patterns. The emergence of Software as a Service (SaaS) as an alternate solution to the one time license appears to be growing in popularity. Delivering a flexible pay and use model appeared to be a better model. It also posed the challenge of who will mediate between a client and an original software tool manufacturer in hosting and maintaining such a software service to keep up with the changing whims and fancies of a client. If someone else hosts the service, then according to (Cusumano, 2007), this reduces the cost incurred by a customer or client, in installing and maintaining the software tool on their own servers and systems. An additional challenge if a hosting mediator can provide such a service, is how to price the service? Pricing for pay and use needs a different approach than what was used for a one time license. The challenge of pricing such a service is a complicated one. This paper looks at the SaaS model from software service pricing perspectives. It looks at pricing from the perspectives of a mediating service provider, keeping the features of SaaS based software delivery in mind. A perceptive analysis of variables that may influence price is investigated. The mediator in the picture is referred to as the "Business Service Provider". Perceptions of the business service provider and the "client users" is described.

A look at literature covering this area reveals that authors have discussed pricing issues of software in general. (Bontis and Chung, 2000) argue that pricing software must take a more subjective approach. They say that there is no generalized formula to value the intellectual capital in the software and thus it is difficult to obtain a generalized pricing model for software. They emphasized important approaches like the 'named user licenses'. They also looked at user classes and user markets in three case studies of GraphOn, Nortel and HireSystems.

Echoing the changing scenario in software delivery, other researchers, emphasize the importance of understanding pricing under these changing scenarios. The warning was that failure to do so will result in a large number of software product companies vanishing and going out of business. …