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The software-as-a-service (SaaS) model is driving a profound shift in the way that software vendors and channel partners approach pricing, according to a recent report by PricewaterhouseCoopers (PwC).
The report says that while the earlier licensing model laid much of the risk with the customer, and the new shift toward the cloud, managed services and SaaS, now places much of the risk with the supplier.
"The industry has to evolve," said Mark McCaffrey, a global software leader at PwC, in an interview with CRN. "Historically, you could set software prices almost where you wanted because the impact was directly to the bottom line, and cost and overhead was not a big concern as long as you manage your channels and sales forces properly. But, the new model forces a level of price discipline that can be a very difficult transformation for many companies. In addition, the hosted element introduces a whole cost infrastructure to support the delivery."
McCaffrey points to the cost of infrastructure and platforms used to deliver the service over a period of time, as well as a change in how sales and channels are compensated. "These are things that you need to get right in order to succeed," McCaffrey said.
Throughout his report, McCaffrey emphasizes a shift toward pricing based on the value that the service is providing to the customer, combined with consideration of the long-term value of each respective customer, which can be as much of an art as it is a science. In addition, providers are urged to target their communications based on the specific role of the intended receiver.
"You need to have a better understanding of how you're packaging your offer, and how your customers are perceiving value," he explained. "If, for example, you charge $9.99 for 30 GB, that will make sense to some people within the organization, but for others, it might be better to tell them that they will be able to store 10,000 images."
In short, companies need to be more aware of which people within the organizations are using their products, given the fact that dissatisfaction on their part can bring about an end to the contract much more swiftly than under the old paradigm.
"About 11 percent of the software market come from SaaS," said McCaffrey. "But if the trends we're seeing continue, and the buying method is toward cloud and hosted services, then figuring all this out is going to become imperative."