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Rethinking Software Pricing in a Service-Oriented World. In their latest newsletter, ZapThink analyst Ron Schmelzer presents the arguments for various software-as-service pricing models. But that's just the tip of the iceberg. I've worked with a number of ISVs who have transitioned their products to services, and pricing is the easy part. One (of many) other challenges is adopting a services mentality.
Is your company prepared to be in the services business? Do the various departments, executives, managers, and individuals understand the differences between products and services? If your company has previously delivered software or data in the form of products, it has some important changes to consider. The Internet has already altered the nature of software-product packaging and delivery, and web services will hasten that change. For example, many software products depend on an Internet connection for registration or real-time help facilities. Delivering a service requires a very different mindset than delivering a product. You might think you’re delivering the same thing, but you’re not.
Consider the difference between cordless phones and cellular phones. You can buy them at the same stores, but the business models and the economics behind them are quite different. Cordless phones are traditional products. You pay for them up front, take them home, and use them. If all goes well, that ends your relationship with the manufacturer, distributor, and retailer, at least as far as that phone is concerned. If the phone fails, you’ll once again interact with the manufacturer or the retailer, but it’s assumed by all parties that that’s a rare occasion.
Cell phones are very different. The cell phone itself is almost incidental to the service; it’s the service you’re really buying, not the phone. You’ll select a cellular phone according to its features and price, but first you’ll choose a service according to its coverage, price, and other policies. You’ll have an ongoing, long-term relationship with your service provider. If all goes well, your service relationship will outlast your phone, which you may well replace without switching providers.
Consider the warranty differences, too. For the cordless phone, the warranty covers just the hardware. For the cell phone, there’s also a service-level agreement. It’s not too sophisticated, and it certainly gives the cell-phone provider many outs—but it does give you certain remedies for dropped calls and the like.
If you’re currently a software publisher, your primary commitment to the customer is that the software works as promised. The warranty you provide with your software probably only covers the media on which the software is delivered: You’ll replace defective CD-ROMs. Most shrink-wrapped software is sold as-is, bugs and all.
But like cellular-phone providers, web-services providers promise to deliver value on an ongoing basis. The relationships (and the revenue streams) are continuous. If you don’t continue to meet and anticipate the customer’s needs as they change over time, you’ll run the risk of losing that customer. Consider these differences carefully as you shift to a services-oriented distribution model. The implications are both subtle and significant. [excerpted from Loosely Coupled--The Missing Pieces of Web Services]
Posted Thursday, November 06, 2003 7:07:25 PM 
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