Alan Cane: Why the price must be right

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Software pricing is a recondite subject, best left undisturbed. Unless, that is, you are a data processing manager balancing your IT budget or a software company boss trying to ensure adequate cash flow to see the next product through to market.

Or, for that matter, a games enthusiast wondering whether $39.95, down from $49.95, represents good value for The Godfather, the latest potential blockbuster from Electronic Arts (the delayed arrival of Sony’s Playstation 3 console is playing havoc with finances in the games sector and forcing even the biggest games publisher to rethink its pricing policy).

From a developer’s point of view, the dilemma is to balance a price acceptable to the customer with the need to generate sufficient profit to grow and invest adequately in research and development. It’s a complex equation. Increased, often cut-throat, competition together with the hugely increased cost of software development is forcing producers to look for new ways to boost revenues.

Large software suites are typically licensed, not sold, with the aim of ensuring that the producer can count on a continuing revenue stream from product upgrades. Ram Dhaliwal, Microsoft’s UK licensing marketing manager, says the world’s largest software house prices its products according to what it judges the market will bear, while Sunny Jensen Charlebois, in charge of Worldwide Licensing and Pricing for the company, says its customers and partners want predictability: “One element of this is a predictable price for licensing Microsoft products. Therefore, changes to any regional pricing are done very rarely.”

It was Microsoft, however, which five years ago proposed changes to its product licensing arrangements which the market would not bear, drawing unprecedented protests. Its customers argued they would be forced to pay for unwanted upgrades to their existing applications at times not of their choosing.

The Infrastructure Forum, a lobby representing almost 100 large computer users, made representations to government. Microsoft, however, made sufficient concessions to mollify its indignant customers and the affair petered out.

But as David Roberts, Infrastructure Forum chief executive, points out, it was the first time a software issue had reached the boardroom and brought home to board members the way that software pricing could affect their businesses.

As one executive remarked: “It has changed the nature of our customer relations (with Microsoft) for ever.” And today there remains a simmering discontent, not only with Microsoft but with most of the large software providers.

Price is not the only issue. A straw poll of Infrastructure Forum members shows four chief criticisms. They are concerned, first, that application upgrades often feature new “functionality” that users neither want, need or are prepared to pay for. While they accept the need for evolution, they argue that the software must meet their needs and requirements.

The Forum members’ argument is backed up by a recent study carried out by the research consultancy Butler Group which found that more than 50 per cent of the functionality in enterprise software bought by large organisations was unused – although it puts much of the blame on IT management for failing to link functionality to business aims.

Second, they are critical of producers who rush products to market without adequate testing. The result can be systems crashes and expensive and time-consuming repairs – “patching” in the trade’s argot.

Third, they point out that shrink-wrapped, load-it-yourself software is unsuited to complex business environments. Companies need support from their suppliers to get the most from their software.

Last, upgrade cycles: some suppliers refresh their software every three years, while big companies work on a five to seven year cycle. The result is that these customers do not see adequate return on their investment.

Some software houses are adopting sophisticated methods to maximise their profitability. Organisation and Technology Research (OTR), the consultancy advising the European Commission in its action against Microsoft, has discovered that an automated licence-auditing tool (software designed to ensure a company buys only as many licences as it needs to) developed by a leading software house in the business planning area collects and delivers back to the developer more than 116 business variables when six would do.

The inference, OTR suggests, is that the software house can calculate many of its customer’s key business metrics, giving it an invaluable guide to pricing its software for maximum profitability. OTR believes this may be true of other suppliers as well.

So: caveat emptor. All this suggests the mismatch between what software companies offer and what their customers want – which has existed since the beginnings of business computing – is not improving. It may be that web-based software provision, where software becomes available as a service, a range of downloadable components across the internet rather than as a series of physical disks, forms the basis of a more equitable pricing mechanism.

But the cost of research – and Microsoft, for example, is increasing its R&D spend by 12 per cent a year – will always have to be factored into the equation.

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