Service-Based Approach Disrupts Software Industry

By Samuel Greengard

The last few years have served up enormous changes in the way customers and clients consume products and services. One of the most profound and disruptive events, according to a new PwC report, “The Future of Software Pricing,” is the move from licensing applications to a services-centric approach.

“We are witnessing a formative movement from a singular, traditional pricing model to a market with five pricing models,” states PwC Global Software Leader Mark McCaffrey. “Many companies currently find that straddling two or more radically different models with different complexities and different measures of profitability and growth is overwhelming.”

In addition to the traditional licensing approach, emerging models incorporate subscription-based software as a service (SaaS); pay-as-you-go systems based on transactional metrics; and the so-called Freemium approach that offers a free version, but lets customers upgrade to a premium package with additional features. Not surprisingly, some organizations are turning to hybrid pricing models.

Fundamental changes in the marketplace are driving these changes. “The consumerization of IT has raised the expectation that technology can deliver high performance at low cost,” McCaffrey explains. “The perceived value of the software may drop as a result of cost-conscious users accustomed to consumer smartphone apps that rarely cost more than a few dollars.”

There’s no simple fix. According to PwC, organizations must focus on a framework that revolves around pricing strategy, price formulation, transaction management and managing performance—all of which span a company’s internal processes, organization, technology, data and analytics.

Pricing strategy involves overall pricing goals, strategy and analysis. Price formulation addresses overall and segmented pricing and policies, as well as pricing data and rules.

Transaction management centers on requests and opportunities, prioritization and allocation, quoting and deal management, and policy enforcement. Performance management focuses on sales force and partner enablement, pricing performance and management, and compliance.

Although the software industry has achieved remarkable success in both top-line growth and profits in the past, this disruptive shift is causing companies to re-evaluate their fundamental value propositions. These macro trends, PwC predicts, will change the growth, innovation and complexity of these organizations.

Software producers must examine the following key issues in order to develop the right model, PwC reports.

• How best to redefine the value proposition to recognize the worth of a customer relationship rather than the value of a transaction.

• How to establish pricing rules and discipline to avoid eroding margins associated with discounting.

• Understanding changes in cash-flow models and new approaches to research and development.

• Ways to change R&D cycles to shift from a mentality software (a series of discrete releases) to more as an ongoing series of functional improvements.

• Recognizing new sales cycles and the fact that lower initial barriers to entry exist.

• Noting the importance of close personal relationships and customer services in supporting future sales.

“As consumers’ perceptions of value continue to drive prices lower,” McCaffrey concludes, “vendors are revising their value propositions to include service and support, while more explicitly linking the price of products and services to the business value they deliver.”