I was reading a great blog post by Nicole Laurier of Fisher Technology on the Juice Marketing blog, Software Sales: The Argument for Fixed Pricing (Ownership) or Monthly Subscription (Rental). The article points out the effects of the current migration from perpetual licensing to subscription based licensing on Customers, Business Partners (VARs) and Software Developers. The article makes some great points from each perspective:
- Customers gain predictability in cost and eliminates the large upfront costs for licenses
- VARs would lose their upfront commissions in favor or a long term revenue stream
- Software Developers gain increased contact with their customers and can reduce the margins they pay their VARs
Nicole’s conclusions, even without a crystal ball, are that “the answer for customers, VARs, and software vendors would be to have some type of hybrid of both outright purchase and subscription options. In that way, businesses will have a choice of buying in the way they want.” This is what I-BN has been advocating for years because the subscription pricing model tends not to be all inclusive. Even if 100% of license, maintenance and upgrades are included, the subscription almost never includes training, configuration or business process redesign.
The real issue from a customer perspective is the method in which subscriptions are being sold, especially in the ERP market space. Subscription based pricing is great for commodity services, short term projects, and businesses with cyclical businesses if subscriptions are variable.
- Credit card processing, tax calculation service, currency conversion, etc. are great examples of connected services which are commodities which fit a subscription model to the tee because you pay for consumption.
- Project based subscription software for construction, professional services, etc. are also perfect for subscriptions. Costs can be associated with and attributed to a project and turned off at its completion.
- Companies that have peak and valleys in usage can take advantage of subscriptions that are on a short time frame. Take for example a catalog company that has 100′s of call center people in the holiday season and a dozen during off peak times. A call center software paid per seat per month would be a perfect subscription application.
Regardless of whether the subscription is for a web native product like NetSuite or a web-enabled product like Sage ERP MAS 90 Online, there tends to be an annual or multi-year subscription. There is no ability to scale down in off peak periods and ERP is not a commodity. Changing ERP systems is hard work and disruptive to operations before all of the benefits are gained, so companies plan to keep ERP systems 10 years or longer. Even if we can’t plan what technology or business will be like in 10 years, selecting an ERP package often hinges on the confidence that the software developer will be in business for the long haul and can keep up with new technology and business practices.
Companies like Sage, Microsoft and SAP have all done the math and calculated how much extra money they will make with subscription pricing (as part of their price calculations) based upon current and anticipated usage patterns. Customers will as well. Therefore, either subscription pricing will not capture a large ERP market share or software vendors will adjust the policies to balance increases in revenue to the value provided by the lower up-front costs (similar to leasing).
That is unless you think, a sucker is born every day!
Tags: ERP, MAS 90 Online, NetSuite, Sage ERP MAS 90, Subscription Based Pricing
