‘All you can eat’ may leave you with indigestion

Mallorcan lunch

It doesn’t matter whether you work in the public or private sector, everyone is looking to do more with less which includes pressure on software costs. Recently I have been looking at pricing models with clients in the private and public sectors and on both sides of procurement which has prompted some musings on software pricing and how it compares with the pricing of other products.

The more you buy the less you pay

Go into a supermarket and the larger packs tend to be cheaper pro rata, the manufacturer will make some savings in packaging and distribution which will justify the price reduction. For most manufactured goods the pricing model will include some form of volume discount which is usually driven by economies of scale in manufacture and distribution. In today’s software and SaaS world we see the same tiered pricing with discounts for larger numbers of users although to a large extent the marginal cost of producing software is zero, so there are few if any economies of scale.

Enterprise pricing

Enterprise software pricing is (or should be) set to maximise revenue for a vendor, both within an individual organisation and across the potential market (industry, country or global). This PWC paper “The future of software pricing excellence” highlights the importance of pricing strategy to software businesses

At a time when the enterprise software sales model is shifting from product-based to portfolio-based and customers are adjusting their purchasing decisions to include their perception of added business value, vendors can no longer consider their pricing models incidental. Pricing can, in fact, play a critical role in business strategy.

Pricing models have changed over the last few years from perpetual to annual, from per user to banded users to transactional models in the cloud and to enterprise agreements for large on premise deployments. It seems to me that a common theme to the developments in pricing models has been that you “get a lot more for a bit more”, the unit cost (however you measure that) may fall but your overall bill goes up. Of course you have more capability or more people enabled and more value delivered to your organisation but the benefits come at an increased cost. The vendor wants you to use more software, embed it deeper into your processes and to make it increasingly difficult for you to change supplier.

So when a vendor offers you some kind of unlimited usage deal, you might want to pause and ask yourself who is going to get the most benefit from this deal and what happens at the end of the term? It could be that ‘all you can eat’ will give you indigestion.