A series of articles published at the end of 2005 highlighted at great length a conundrum on price per value that has long affected enterprise application vendors and their users. Specifically, while vendors would like to have well-oiled business models that promote stable and recurring revenue streams (which in turn would ensure future product and service enhancements), users favor freedom of choice (in terms of which vendors they purchase enterprise software from, and how they implement and pay for that software).
To be fair, one needs to acknowledge the revenue recognition guidelines that publicly owned, US-based companies must abide by. These revenue guidelines promote the current and perpetual software licensing and software support and maintenance arrangements. In addition, "pricing potholes" exist even within the more recent and creative initiatives (that is, "value-based pricing," "pay as you go," "on demand," "software as a service [SaaS]," etc.) that, at the end of the day, might carry unforeseen costs and become more expensive over time.
Such pricing mechanisms typically work well for smaller and simpler applications, but have thus far largely failed with the more complex enterprise-class applications. Further, the on demand pricing model is a hard transition for software vendors that are used to receiving large, up front payments and spending them right away. Dollars spread out over time results in huge transition costs. Stockholders and all but the most cash-abundant software companies cannot handle this transition cost, so the transition process has to be very slow. In the long term though, on demand initiatives should make any vendor stronger and more profitable. But in the short term, it may just "kill" some vendors if they go this route too quickly (meaning if on demand solutions are all they begin to offer their customers in a short time bracket).
In any case, the series of articles in question had certainly stirred up a slew of mixed reactions, which naturally varied depending on which camp they came from (see Is There a Panacea for Enterprise Software Pricing Yet?). Specifically, while users felt favorably toward the content preaching about their "bill of rights" and freedom of choice, this was certainly not the case with the vendors' staffers.
To allay any misunderstanding, let us state unequivocally right here and now that it was not our intention to create a gossip column or to imply that enterprise software is unjustifiably overpriced. We even agree with one reader's comment that
Building quality enterprise software is difficult, expensive, error prone, and unregulated. The day when we will build software the way we engineer cars or buildings, it will become much more reliable, but much more costly as well. Today, people accept bugs and problems in software because it is the way this industry has always worked and otherwise, it would probably be so costly that there would not be an industryand it will stay like this for a long time given the increasing appetite of people for cheap and disposable goods and services.
To be fair to vendors, we also agree with the fact that some users have a "devil-may-care" attitude toward implementing and using their software. One comment even went so far as to state that
Customers get what they wish for, if customers were more realistic about the dynamics in play in creating, delivering and maintaining a world class software solution, they would be respectful of the cost/benefit/value equation. If they took the same attitude that many take to software as they do to buildings and transport, they would be working in tents and driving around in rickshaws.
However, related to the above disdainful opinion of users is the highly defensive remark of another anonymous reader (likely coming from a leading vendor's ranks), which said
Clearly the author has never owned, operated, or had to manage the profit and loss (P&L) of a software development company
OK, even if we admit we lack that respected vendor "insider" experience, the point here is that vendors' traditional "from inside out" or "cost plus" pricing strategies are not going to work for much longer, and vendors had better get used to that idea (however upsetting it might be to them). In other words, like in many other industries, sooner or later, prices will be determined by what the market is ready to bear ("the value is in the eye of the customer"). No longer will prices be based on what vendors think is a profitable way to deliver solutions while leaving customers to ask "how high" they should "jump."
Indeed, even today many user enterprises are increasingly demanding more certainty, higher comfort levels, and justification as to why (and what) it is they are paying for. To be sure, "fine print" addendums in enterprise software purchase contracts are common; sometimes longer than the contracts themselves; and typically serve to protect the vendor from any future liabilities. Such addendums customarily cite that the contract includes only the stipulated, basic functional and service scope. For any additional module or service attention, the vendor applies another pricing math, whereby the client will likely pay far more at the end of the day than if the client had gone for the "wall-to-wall" license and service arrangements up front.
Questionable Support and Maintenance Value
Nowhere else is this notion (the client paying more over time) as apparent as in the increasingly controversial software support and maintenance (S&M) contracts. For a long time, it had been a dirty little secret of the software industry that the maintenance part of the business is the largest part of vendors' revenues, and is really where vendors meet profitability (if not "money for the caviar," meaning their profits exceed original profit margins).
The situation is somewhat analogous to shopping for a big screen or plasma TV set, a washing machine, or a car at a major retail outlet or dealership. Prospective buyers might be impressed with the nominal sales price of the goods and believe that they've landed a great deal, but before the deal is signed, most of them have been thrown a sales pitch (subtle or otherwise) to sign up for the extended warranty contract. This warranty contract is where the store (and the sales person) makes most or all of its profit. Buying enterprise software is similar in terms of one-time license fees and ongoing S&M fees thereafter. The key difference is that enterprise users do not really have the option to abstain from the maintenance contract (or at least not until very recently).
This is part one of the series Will User Enterprises Ever Get onto an Easy (Support and Maintenance) Street? In the next part of this series, support and maintenance contracts will be looked at more closely, as well as vendor justifications for the cost of these contracts, and what this has meant for the customer.