The software as a service cannot be priced as a regular licensed software. The overwhelming compelling part of this model is the ability for customers to save on upfront cost by very low investment in infrastructure and lower TCO.
The upfront cost savings in some cases misrepresent the ultimate investment, though. According to Forrester, by the third year of deployment, the cost of a hosted application starts to exceed that of an in-house licensed application. By the fifth year of a deployment, the cumulative cost of a hosted application is estimated at more then $1.6 million, while the licensed software costs about $1.4 million annually.
Plus a customer is always stuck with a provider for the term of the contract especially if the software provides value for them.
The option to buy is good but because the software is hosted by the provider most times the customers are lacking in infrastructure to support once it becomes theirs.
The key here is to use pricing to convinve the customer of the benefits of SaaS. Most providers charges a moderate implementation fee and the monthly recurrent fee is priced low so that customers can really see the benefits of using this model as opposed to licensed model.
Like Duncan said, you have to look at 3 factors: the cost, market and competitor and you should price accordingly but at a very competitive price that can really convince the customers the benefits of this option.
Personally, I think the future of this trend would be interesting to see but definitely a growing model.
Kumar- Remember the three Cs of pricing:
1. Cost: What does it cost for you to offer the product or service? This, plus an acceptable profit margin sets the lower bound on what you can charge.
2. Competition: What your customers charge sets the standard for the industry. Unless you have some form of market power that allows you to change the price upwards, or you think you have the resources to start a price war, you need to be in this ballpark.
3. Customers: Assess your customer's willingness to pay. This sets the upper bound on your pricing.
Each of these factors will influence your eventual decision. NPV and other analysis is good, but do it from the customer's point of view, not yours.
I am not sure that is an answer to your question, but it is a framework for thought.
On Jun 7, 2006, at 1:22 PM, Yogish Gowda wrote:
> Hi Kumar, > > I found this spread sheet (in case you don't have this already) on > MicroSoft Website, its a comparison of different SPLA arrangements > that client can enter into with MS and it gives a general idea of the > factors to be considered (as mentioned by John and Remy) in a > situation like yours. > > Regards > > Yogish > > > On 6/7/06, kumar pandey <pandeykum@xxxxxxxxx> wrote:Hi folks, >> Let me welcome you to the group by putting up a question which I have >> been struggling with for the past few days. >> >> Manyof you in the hi-tech world are probably aware that Microsoft >> has developed its Services ProviderLicense Agreement (SPLA) to sell >> software on a pay as you use basis. this allows enterprises or web >> developers to subscribe for the software on a monthly basis as >> opposed to paying a huge upfront cost. The financial advantages are >> obvious to the consumers, they get to pay off the software costs as >> business operating expense as opposed to capital costs. >> >> My question is around pricing. Microsoft says their software under >> SPLA is priced so that customers pay the same amount, over the life >> of the software,in paying on a monthly basis, as they would have >> paid upfront. Now, how does Microsoft or any other software >> developer be able to predict the life of a software when >> technologyis changing so fast? >> >> Does anyone have any idea what industry standards are? Does anyone >> have any idea on how software could be priced and packaged >> differently. >> >> Any thoughts, insights will be appreciated. >> >> -- >> Kumar Pandey >> Chief Operations Officer >> Flatburger Inc. > <Copy of Microsoft_Volume_Licensing_programs_Comparison.xls>