At the beginning of 2014, IDC made the following prediction:
"Usage-based software pricing models will be an option for 80% of applications by 2017."
That is just 2 years from now and this is an enormous business model change for many application producers.
What is the motivation to move to usage-based software monetization models? Here are my thoughts:
Enterprises want this option, they believe usage-based models will…
- Reduce shelf-ware
- Reduce costs by avoiding to purchase full software licenses
- Provide flexibility -- for enterprises that are risk averse, they will pre-purchase usage and for risk-loving enterprises, they will pre-purchase low amounts of usage but risk paying overages
- Simplify forecasting - enterprises don't have to be as accurate in their prediction of license use for the next budget
Producers believe it will increase their revenues
- Left up to their own, producers believe enterprises are more likely to use more than planned if given the opportunity than those that are stopped from using more than purchased (This is why experts always say to go grocery shopping with meals already planned and a shopping list to avoid over-spending)
Reduces pricing friction by shifting to units of value
- Pricing on arbitrary items like "concurrent users/feature" or "# of CPUs" are less and less likely to resonate with enterprises
- Users want simplicity and are asking why pricing for their enterprise applications doesn't work the same way – i.e. "in-app" purchases from mobile apps
Want to price based on value-based meters
- Depth and throughput of an oil drill
- Minutes flown (drone)
- Gigs of DNA analyzed
- Pounds of trash compacted
- Power by hour
Increased producer market valuation
- Recurring revenue is king on Wall Street – usage-based pricing is the ultimate recurring revenue model if implemented as overage
- In certain industries we're starting to see "me too" pressure with usage-based pricing
Why are you adding usage-based software licensing and pricing models?
Flexera Software can help you be part of the 80%.