Pay-per-use Software Pricing? No Thanks!

Duncan Jones
Vice President, Principal Analyst
March 24, 2010

I get a lot of input into my research from speaking with software buyers and sellers, which I analyze and process to come up with firm conclusions and recommendations in my published research and forum speeches. I’m going to use this blog to air some work-in-process analysis, to solicit additional thoughts and information from you. Just recently, Ive been considering why people are talking about ‘pay-per-use’ a.k.a. ‘utility pricing’ for software, and to me, the disadvantages to buyers and sellers outweigh the benefits.

Software pricing should be simple but fair, value-based, future-proof and published (see The Five Qualities Of Good Software Pricing). Yes, a one-price-fits-all ‘per user’ fee isn’t fair or value-based, but that doesnt justify the potentially horrendous complexity of tracking detailed usage. Role-based user pricing, such as SAP user categories, is a much better way to reflect diverse usage profiles.

Im not arguing against flexible, on-demand services, particularly for temporary needs, such as renting some CPU power for a few hours. I’m concerned about pay-per-use pricing models for regularly used applications. To me they would be:

  1. Complex to define and track. How will a company measure time-based or transactional usage when it can’t even count named users reliably?
  2. Unpredictable and uncontrallable. How do you prevent an unexpected, unbudgeted bill at the end of the month?
  3. Expensive. Some people assume that it’ll be cheaper if they only pay for what they actually use. That’s an incorrect assumption. The per hour rate will always be sufficiently more than the per year rate to push customers to the latter. Price is driven by negotiation leverage and competition, not the licensing model.
  4. Counter-productive. You want people to use the tools you’ve made available, so why create a cost disincentive?

What do you think? How do you want to purchase your business applications? What advantages can you see in pay-per-use, over prepaid capacity models, that might outweigh the above drawbacks?

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