Retooling software pricing

As the nature of software evolves into services and hosted models, vendors and customers are facing what is probably the beginning of the end for user-based licensing.

A new era of pricing schemas is emerging that holds out the promise of users paying only for what they use. Analysts say that if users play their cards right, they may be able to negotiate good deals.

The Internet is the primary driving force behind this licensing shift because it opens software to a new realm of users, namely visitors to a company’s Web site.

During the last year, in fact, a number of companies including Microsoft, Oracle, IBM, and Computer Associates drafted new pricing schemas.

“The big problem that software vendors face is that nobody knows what a user is anymore. It could be somebody inside the organization or somebody outside it,” said Chad Robinson, a senior analyst at Robert Francis Group in Westport, Conn. “User-based licensing does not work, and vendors are moving away from it and toward a power-based model.”

Associating value with a user is even trickier, according to Jim Galley, CTO of, a Web-based company that automates the process of cargo load balancing in New York.

There is a distinct difference, for instance, between one visitor who simply visits the home page of a site and another visitor who purchases a Maserati from the site.

The new pricing structures, at least on the surface, appear to benefit the vendor more than the customer.

“A lot of times when we started to look at it from a power-based model, we were penalized because we had no idea how many users would be hitting the site,” Galley said.

Other IT executives, however, see a cost benefit to a model based on service usage with licensing fees, where consumers pay per-transaction or per-usage time, because the process is more negotiable than it used to be.

“It depends on who you are working with. Microsoft changed from a concurrent fee to a per-client fee. But basically, whatever model they use, they want to get US$250 for every employee you have. But there is a benefit to paying for services that are sensitive to demand,” said Tom Webb, technology advisor to the CIO at Shell Oil in Houston.

Vendors maintain that there are a number of advantages to per-service model pricing, most notably that customers pay only for what they actually use.

Whereas buying software outright means a fixed cost which increases as a percentage of revenue during a downturn in business, a per-transaction basis cost means a per cent of revenue that is dynamic.

But without a fixed price, planning for yearly budgets is more difficult, said Henri Asseily, CTO of in Los Angeles.

Naturally, for IT executives to reap any rewards of the new pricing models, they will have to stay on top of the changes and double as deft negotiators.

“One of the challenges is that your negotiation skills determine what kind of a deal you will get,”’s Galley said.

That said, most vendors have yet to iron out their pricing schemas, which leaves opportunities for customers not only to negotiate great deals with vendors, but also to help shape how pricing structures will emerge.

Jacob Christfort, CTO of Oracle Mobile, sees a day when Oracle will base its software fee structure on a percentage of money saved by a company. “More and more we are trying to align what we charge for the software based on the value you get,” Christfort said.

Fees may evolve from a per-user basis to a per-transaction-performed-per-user basis, but they may also include a fee based on per-megabyte of storage consumed.

A bit further into the future, value-based pricing will emerge, charging, for example, by the number of leads a sales software application generates, according to Christfort.

“In the end, the market will pressure ISVs and ASPs to adopt a combination of pricing structures to meet the range of requirements they have. Short-term, we’ll see ASP contract durations come down from the average of three years to under two,” said Robert Anderson, an analyst at Gartner, in Stamford, Conn.

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