Pay-per-Use software pricing forcing reassessment of the industry's value framework 9 March, 2010 By Mark Cox

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"IDC believes that the software industry must move from a position where value is equal to the product to a model where real value lies in the ease, intuitiveness, and seamlessness of the experience," said Amy Konary, research director, Software Pricing, Licensing, and Delivery.

"Licensing models that provide customers with access to positive experiences must also take into account the heterogeneous nature of the customer base as well as the role of the individual in value creation," Konary said. "For this reason, software packaging and pricing constructs must provide a level of granularity that enables the customers to participate in the value-creation process."

So how does all this come about?

IDC says that to enable this type of value creation, software vendors must immerse themselves in the activities of their customers to determine what they are hoping to achieve with the software. Once the vendor understands how the customer is using its software, it will be easier to determine the metric that is most appropriate for per-use measurement. But the move toward greater granularity and flexibility in pricing presents vendors and customers with a series of challenges, including: increased complexity in the applications; the need for tools to measure use; concerns about revenue and cost impact; and the fate of the partner ecosystem based on traditional notions of value.

"As customers continue to press for more flexible licensing approaches, IDC expects that some of the predominant practices that represent the status quo in the software industry will need to break down," Konary said. "Most existing systems, on both the customer and the vendor side, simply do not meet the requirements and complexities of a pay-per-use model."

It is not yet clear what impact usage-based pricing models will have on the economics of the software industry as a whole. In the meantime, software vendors need to focus on a series of issues to prepare the way for PPU and utility licensing options:

Because customer preferences vary, vendors need to be prepared to offer a portfolio of licensing and delivery approaches