Ontic Oren

A topic very near and dear to my heart has picked up some steam recently: Enterprise software pricing. Kicked off by ReadWriteWeb, and picked up elsewhere, the basic point is that value is not correlated strongly with per-user pricing.  All these “Enterprise 2.0″ companies are out charging on a per-user model, but that’s at odds with the value derived by the customer.

Let’s first take a step back and look at the big picture.  Business model and pricing is a means to an end.  Ultimately, as software producers, we are in a VERY strange world in which our incremental cost is $0.  As with any intellectual property sale, since their is no intrinsic cost to our product, all pricing is simply a matter of playing with funny models to make the customer feel like they’re not getting ripped off, and the vendor able to generate enough revenue to survive, and in rare cases maybe even thrive (rarer every day it seems).  As a previous boss of mine used to say – software pricing is all insane, it’s just a matter of agreeing on the insanity.

At the end of the day, all that really matters is what $ amount changes hands.  A total $ vs. value graph for these Enterprise 2.0 companies looks very different:

In this graph, value still goes up quasi-exponentially with the users.  Total cost also scales, but it’s quasi-logarithmic. Instead of being inversely proportional, we’re now just looking at a gap in the middle. Further, it’s a gap that companies are used to paying.  Yes, I’m ignoring all the capped deployments and models that are “packaged” vs. per user, but in general the vast majority of scaling 2.0 business models net out to the above graph. 

Our entire life experience, plus all previous experience, tells us that the more you buy, the less you pay per item, but the more overall it costs.  Trying to go against this is probably impossible.  Software pricing is about putting a framework in place that makes your customer feel like they’re not getting ripped off, and enabling you to run your business.  Everything else is just hand waving.  Make sure the general curve of your overall monetary exchanges is correct, and focus on the value in the product.  Pricing is necessary, but not sufficient.  It’s easily possible to setup a pricing model that’s so broken it kills your business, or doesn’t scale to support where you need to go.  On the other hand, you’re not going to make your business through a pricing model (as proven through Sun’s numerous attempts with Project Orion, network.com, etc…).

Come up with a model that scales.  Something that if your assumptions work out, enables you as a business to succeed.  Then focus on the business and value to the customers.