CIOs clamor for usage-based pricing

Vendors eager to keep mining today's rich vein of upfront licensing revenue may resist the move. however

Sick of overpaying for features they don't need or use, enterprise software customers are eager for vendors to adopt pay-per-use models that better align cost with consumption, according to an IDC report published last month.

Vendors that are eager to keep mining today's rich vein of upfront licensing revenue may resist. But they risk losing customers to software-as-a-service providers like Amazon.com Inc., which offer pricing schemes closer to true pay-per-use models, IDC said.

"Customers believe they have been forced to buy more software than they need or use," wrote IDC analyst Amy Konary. This creates a "value disconnect" that isn't alleviated by heavy discounting, she said.

Konary argued that vendors should move to pay-per-use models, under which they will have to do more to make sure customers are satisfied, and "where real value is in the ease, intuitiveness, and seamlessness of the experience."

She compared it to the music industry's shift from selling CDs to selling individual songs to customers, who are now empowered by software to manage their music collections the way they want to. She also likened it to Amazon's Web-based storage service, EC2 , which lets companies host their own software and pay for it based on the number of application-hours used.

That's not true usage-based pricing -- users pay the same rate whether the app is heavily or lightly used -- but it allows customers to "purchase at a more granular level than was previously possible," Konary said.

Vendors are justified in fearing they would lose revenue from usage-based pricing, she wrote, but CIOs want assurance that costs won't suddenly spike as a result of unexpectedly heavy usage. A compromise would be the kind of tiered pricing used by cell phone carriers, Konary said.

This version of this story was originally published in Computerworld 's print edition. It's an edited version of an article that first appeared on Computerworld.com.

Read more about software in Computerworld's Software Knowledge Center.

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Eric Lai

Computerworld (US)
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