MikeCloud computing has paved the way for new revenue models for Software-as-a-Service (SaaS), as it’s no longer necessary for a consumer to purchase and install software in the traditional manner.

Today, a consumer – and a provider – have options: pay-per-use, software rental or traditional software licensing.

The pay-per-use model features a pricing structure where a consumer is charged based on units used, whether that is an amount of time, number of transactions, etc. For vendors and consumers, the pay-per-use model has both advantages and disadvantages:

Vendor Advantages:

  • Diversification, as a reduced cost (compared to traditional licensing) can open the door to a wider consumer base on a tighter budget
  • Limited ability for consumers to pirate

Vendor Disadvantages:

  • Easier for a consumer to switch to a different provider or service
  • Increased administrative work in order to monitor consumer usage
  • Increased difficulty in reliably recouping development costs

Consumer Advantages:

  • Cost based on use typically requires no special budgeting
  • No additional IT infrastructure needed or additional IT personnel
  • No hidden costs

Consumer Disadvantages:

  • No price negotiations
  • Difficult to estimate how much the software will be used
  • Cloud data security is a concern

For vendors, it’s easier to reach a wider audience with a lower price point, but it’s also necessary to keep a loyal base of consumers to recoup costs. For consumers this model is easy to budget for and easy to leave behind if it doesn’t suit.

The software rental model requires a consumer to pay a fee to use the software for a limited timeframe.

Vendor Advantages:

  • Pricing flexibility
  • With loyal consumer relationships, this model can generate more revenue than other models

Vendor Disadvantages:

  • Consumers can easily switch to a different provider or service
  • Increased difficulty in reliably recouping development costs

Consumer Advantages:

  • Possibility for price negotiation
  • Total costs are predictable; no hidden costs

Consumer Disadvantages:

  • Payment is required no matter how much the software is used
  • Cloud data security is a concern

For vendors, this model allows for flexibility in pricing that can open up the service to a range of audiences. For consumers, the pricing for this model is predictable, and therefore easy to budget for, but if the software isn’t utilized, the money spent is lost.

Finally, software licensing is the traditional revenue model requiring consumers to pay an initial license fee and often a maintenance fee as well.

Vendor Advantages:

  • A high license fee helps to cover development costs
  • Increased consumer loyalty due to high cost

Vendor Disadvantages:

  • Revenue chain ends after initial fees
  • Piracy is more likely

Consumer advantages:

  • Purchasing a license can be profitable over time if the software is used often
  • Increased ability to store and secure data within consumer’s own data center

Consumer Disadvantages:

  • Hidden costs related to maintenance fees, etc.
  • Time required to implement software
  • More difficult to switch to a different provider

For vendors, this pricing arrangement can bring in guaranteed revenue, but consumers can more easily pirate and share the software. For consumers, licensing can involve hidden costs and it is harder switch to a new service if you signed a contract or can’t afford to budget for something new.

All three models are beneficial in the marketplace, and it is important for a vendor to consider its target market when choosing which model to provide. It’s also necessary for a consumer to consider its own organization and how the software will be used.

Both parties need to weigh the size of an organization, the target market of an organization and the risk of piracy before deciding which path to take.
For many organizations and vendors, software rental is a compromise between pay-per-use and traditional licensing.

Source: IT Pro, May/June 2013

Mike Harris
DCG President

Written by Michael D. Harris at 05:00
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