Trends in the Value Selling of Software
By Tom Cissell

 

Alignment of Usage Based License Fees With Customer Revenue Stream
IDC, Gartner, and Forrester all forecast an increase in usage based software license fee paradigms sometimes referred to as “utility” pricing because of the analogy to the way that utilities charge for their service.  While this trend is currently in its infancy, The Cistek Group has observed a variety of usage based metrics, some of which incur more resistance than others in the market place.  In general, the more closely aligned that a supplier’s pricing metric is to the customer’s own pricing metric, the lower the resistance.  Refer to Figure 1.

For example, suppose you are a database software supplier wishing to accommodate your customers by offering them a usage based pricing paradigm.  You decide that your pricing metric will be the number of monthly accesses by users per month.  This seems to be a fair way to charge since the value received from your software increases the more it is used.    Suppose one of your customers is Dunn and Bradstreet’s Hoover’s which sells subscriptions to an online data base of public and private companies.  Hoover’s charges their customers an annual subscription fee independent of how many or few times the subscriber accesses their database.  Your pricing metric is not well aligned with theirs.  So, if a Hoover’s customer accesses the database very frequently, the margin on that account erodes.  Depending upon your price per access, they might even lose money on a heavy user.  Hoover’s might resist your pricing paradigm.  However, if you choose a pricing metric of a monthly fee per subscriber, then their cost would be in proportion to their revenue and they would likely to be more accepting of such as paradigm – assuming the price per subscriber was reasonable.  Of course, if Hoover’s moves towards a usage based pricing paradigm, then your fee per monthly access per user might meet with little resistance.

Figure 1 – Customer Acceptance vs. Alignment of Pricing Metrics

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