While customer interest in pay-per-use (PPU) pricing is not a new phenomenon, the expansion of software as a service (SaaS) offerings and the advent of cloud computing are accelerating this trend. A recent software pricing survey by International Data Corporation (IDC) shows that customers want software pricing models that allow them to pay only for what they use while maintaining an even distribution of costs over time. To achieve this, vendors and customers will have to work together to redefine the software value framework.

"IDC believes that the software industry must move from a position where value is equal to the product to a model where real value lies in the ease, intuitiveness, and seamlessness of the experience," said Amy Konary, research director, Software Pricing, Licensing, and Delivery. "Licensing models that provide customers with access to positive experiences must also take into account the heterogeneous nature of the customer base as well as the role of the individual in value creation. For this reason, software packaging and pricing constructs must provide a level of granularity that enables the customers to participate in the value-creation process."

To enable this type of value creation, software vendors must immerse themselves in the activities of their customers to determine what they are hoping to achieve with the software. Once the vendor understands how the customer is using its software, it will be easier to determine the metric that is most appropriate for per-use measurement. But the move toward greater granularity and flexibility in pricing presents vendors and customers with a series of challenges, including: increased complexity in the applications; the need for tools to measure use; concerns about revenue and cost impact; and the fate of the partner ecosystem based on traditional notions of value.

"As customers continue to press for more flexible licensing approaches, IDC expects that some of the predominant practices that represent the status quo in the software industry will need to break down," Konary continued. "Most existing systems, on both the customer and the vendor side, simply do not meet the requirements and complexities of a pay-per-use model."

It is not yet clear what impact usage-based pricing models will have on the economics of the software industry as a whole. In the meantime, software vendors need to focus on a series of issues to prepare the way for PPU and utility licensing options:

• Selecting resource utilization metrics that make sense in the context of software business value is one of the first challenges that a software vendor will face in moving to a PPU model
• Vendors will need to work closely with their customers to determine what makes the most sense. Vendors must also be able to provide complete and detailed billing summaries that eliminate the customer need to collect usage information. The ability to provide accurate and timely resource utilization information will be crucial to winning customer acceptance of any new pricing structure.
• In addition to PPU pricing and tracking, the software architecture and delivery methodology must enable fast and flexible deployment of software resources to meet customers' changing business needs.
• Because customer preferences vary, vendors need to be prepared to offer a portfolio of licensing and delivery approaches.

About this market research study

The IDC study, Pay-per-Use Software Pricing – What You Need to Know Before the Meter Starts Running (IDC #221517) introduces the notion of PPU software pricing and presents empirical data that demonstrates there is, in the software industry, both interest and skepticism to this approach. The study also presents some of the challenges to the adoption of these models and describes the enabling technologies that will play a role in the process.

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