Simple pricing not so easy

By Kate Evans-Correia, Editor 14 Feb 2005 | SearchSAP.com

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There's something you should know about major vendors and this movement to simplify their pricing models.

Every software vendor knows there's waste. Carl Claunch, vice president of research and advisory services, Gartner Inc.

They may not actually simplify anything for you, or save you money. The fact is, experts said vendors are struggling with dwindling software margins and increased competition. For many, the restructuring of their pricing models is more about marketing than making your life easier.

Observers said dozens of vendors, including IBM and Sun Microsystems Inc., are fending off intense competition from rivals, as well as pressure from customers, by changing the way you pay for software, hardware and services. Vendors said they're making pricing less complex -- and in most cases it's true. But for some data center managers, the attempt seems more like a ploy to squeeze more money out of them.

"Making it simple often means making it simple for them," said Robert Beattie, who works in change and problem management in the data center for Ford Motor Co., Dearborn, Mich.. "Sometimes it works in our favor, but often the pricing structure changes can be dramatic and not necessarily for the better. Too often it means just limiting our options. We spend a lot of time spinning our wheels trying to figure out how this will affect our existing deals."

Negotiation: Bring it on Professional negotiator Jeff Gordon said what's at issue with all these new simplified pricing models is that at face value, they look great. It's only when you start adding the numbers that you realize, none of it may actually work to your benefit. Pricing models have really come full circle, Gordon said. As computer usage evolved, so did the software license, and vendors started introducing models that upped their revenues and had little to do with what was right for the user. That hasn't changed, he said. "They're giving the customer what they want to hear, but not necessary the best deal," he said. But all these new pricing models do give data center managers the opportunity to renegotiate and possibly lower their overall costs. So use it to your advantage, he said. Play one vendor off another. Vendors are losing business because their pricing models aren't as appealing as a competitor's. But if they come to you with a new licensing model, be aware that it's not typically for your benefit. Data center managers need to ask themselves, who is this best for -- and the only way to answer that question accurately is to know your business model inside and out -- how many servers, how many applications, how many users. "These new models will hurt the uninformed -- those who don't fully know to the extent their products are being used," Gordon said. "Because you can bet the vendor knows exactly how many CPUs you have running their products and they know which pricing model will work in their favor." -- Kate Evans-Correia

That's not to say that new pricing models aren't simple or that some of the new pricing models won't actually work in your favor. But experts warn: Just because it sounds good, doesn't necessarily mean it's good for you. So when you're about to renew your software licenses or sign on with a new vendor because of its simplified pricing plan, pay close attention. Or you could end up paying more than you bargained for.

Pricing: The great divide

Expect software pricing to be the next battle ground -- the big differentiator between vendors and their rivals.

Sun executive Steve Campbell said his company is taking an aggressive tact in pricing and he expects once other companies figure out the power in effective pricing it'll be a "blood bath."

"We view software licensing as a business model," he said. "We look at it as an opportunity to go where no one else can follow us."

But not every vendor is a leader and some are even reluctant to change their pricing -- most likely because they don't know which pricing model makes sense for them.

"Every software vendor knows there's waste," said Carl Claunch, a vice president of research and advisory services at Stamford, Conn.-based Gartner Inc. "But if they move to something by charging for what you use, for example, revenue drops. So, how do they recognize revenue? It's a very thorny issue."

Sun made headlines last week with a new pricing model some consider bold, if perhaps not all that wise. The new model, dubbed Sun Grid, is a utility computing program where data centers pay a $1 per hour for each CPU and $1 per month per gigabyte of storage. The company also announced recently that it would start charging for software per employee. That, too, has raised more than a few eyebrows.

"Sun has been very aggressive with their licensing, but that frankly is an uphill battle because it's so different," said Stephen O'Grady, an analyst with RedMonk, Bath, Maine. "It's evolving a little bit, but that model is their way forward."

A pricing evolution

While most pricing models might not be as dramatic as Sun's, you can expect most vendors to offer you a pricing plan that is easier to understand. You'll hear terminology such as subscription and utility pricing. The most common of the simplified pricing strategies is utility computing or the pay-as-you-go model.

In many cases, this is the way many data center managers want to pay for their computing usage. The theory that you only pay for what you use is appealing on several levels, particularly for businesses that can't necessarily predict spikes or drops in processing demand.

Under fire for years for its archaic pricing models, IBM is at the forefront of the pricing revolution with its on-demand capacity-based pricing model. That model is rapidly taking hold and being adopted by other vendors, such as Oracle Corp. and Computer Associates (CA).

Despite IBM's attempt to simplify, however, there are areas where IBM still has a lot of work to do. The cost of upgrades and license fees for software on a mainframe is choking some data centers and because of it, many shops are dumping their mainframes for less expensive platforms.

"Software pricing will remain the single biggest factor in mainframe cost of ownership -- and it's limiting IBM," said Mike Chuba, a research director, Gartner. "IBM likes to lay the blame on ISVs [independent software vendors], but people who live in glasshouses shouldn't throw stones."

Dave Thorn, a mainframe capacity planner for SunGard Availability Services, Mt. Laurel, N.J., said his company has always had difficulty controlling mainframe costs. Still, he said he believes all this price restructuring will eventually trickle down to the mainframe shops.

There's hope for some reasonable agreements with software vendors," he said. "Now that CA has loosened up, there may be some vendors that will follow suit and maybe that'll start a price war."

Read more: Modernizing with SAP: Advice and guidance Sales people are sharks and other truths of negotiation

The advent of dual-core processors is also creating a shift in software pricing. Dual-core processors offer two processing cores on a single chip. This doubling of power has created some concern that software license fees will double, too, and vendors are split on how to charge for software running on dual processor machines. Some vendors want to charge per processor, which could double the cost of software per computer. Microsoft said it will not change the way it licenses software when dual-core processors hit the market, but experts said Redmond could be in the minority.

So while the different models are varied, there isn't likely to be one standard. Vendors will attach themselves to a model that works best for them.

But don't expect all vendors to hop on the simplicity bandwagon immediately. O'Grady said some vendors are stalling -- mostly because they haven't figure out which model they want to use. And the confusion over which model offers the best pricing isn't to end anytime soon. So the change you see beyond the major vendors will be an evolution rather than a revolution.

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