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We hear a lot these days about the new era of the "empowered customer," with customer experience becoming a key driver of business value. I may be biased given the lens through which I look at the world, but I believe that pricing is a key...


We hear a lot these days about the new era of the "empowered customer," with customer experience becoming a key driver of business value. I may be biased given the lens through which I look at the world, but I believe that pricing is a key contributor in shaping both value perception and customer experience.

However, in the technology industry, and in software in particular, executives do not pay nearly enough attention to the impacts of their own pricing policies on customers' overall experiences. Customers should stop accepting this.

If pricing and licensing were included in the measurement of software customer satisfaction, the result can best be exemplified by a few representative quotes from some of my recent conversations with software customers:

  • "The bottom line is that (the software producer) scares the hell out of us. They use what I would term strategic ambiguity. The company's Web site says that for further pricing information contact your reseller. You do this and get one answer. Then you go to another person and get another answer. Strategic ambiguity in the environment creates unknown situations."
  • "I just want to know how much it costs and what type of license I need, and I get a different answer from everyone that I ask. It's not straightforward."
  • "This (complexity) has gone from ridiculous to just plain stupid on the part of (the software producer). This does not encourage me to spend more with the company."

You get the point. Sentiments like these should be considered a big problem in the era of an empowered customer. So how can the customer experience of paying for great software improve? Well, one way is to move away from thinking in terms of licensing "ownership" of software toward gaining "access" to positive experiences with software.

Traditional pricing and licensing models assume that the value of software is in the features and functions of the product as determined and packaged by the vendor. However, this does not take into account the customer's experience with the software over time. As a result, the software market is cluttered with products that are often feature-rich but experience-poor.

The typical software customer experience begins with an unpleasant license negotiation. After the negotiated software purchase, the customer is left to shoulder the burden of implementing the software in order to begin seeing a return on investment, while the vendor moves on to sell licenses to other customers. In the traditional scenario, the vendor does not play a central role in ensuring that the customer has a positive experience over time because there is very little incentive for them to do so-- other than the (remote) possibility of losing a maintenance customer.

Customers want access to positive experiences, and subscription pricing has proven to be a better means of facilitating this access than the perpetual license model. This is one reason that subscription models are on the rise, growing much faster than traditional license models. And, it isn't just start-ups offering subscription-- 16% of the top 100 software vendors have greater than 50% of their revenue coming from subscription.

It is the continuous interaction between the vendor and the customer that helps shape the customer experience, and subscription pricing models provide a mechanism for ongoing value creation and measurement. With subscription, there is perpetual vendor accountability to continually deliver and demonstrate the value of their software to customers.

Rather than sell a product for a one-time license fee and then disappear until it is time to sell the upgrade, subscription requires vendors to be make certain that each customer is receiving value from the software-- their recurring revenue stream depends on it.

Developers need to create software products that are easy to use, intuitive, and ultimately enable quality customer experiences with the software. Additionally, the vendor and customer are jointly responsible for making sure that the customer is able to implement and access the software smoothly, thereby allowing the vendor to actively participate in the customer's return-on-investment (ROI) evaluation.

Software customers play an essential role in shaping their own experiences. The average customer will have to manage hundreds of software contracts-- both subscription and perpetual. From a process perspective, organisations should consider the manageability of software subscriptions and licenses at every stage of the software purchase process. Breaking down organisation silos such as those between procurement, IT, and business units will also help companies manage software more effectively.

In addition, customers will need to make compromises For example, they should resist the urge to ask for special terms in every negotiation. In many cases where customers find software pricing too complex, the very term that confound them were created for them by the vendor in response to their request for custom flexibility. While this might be necessary in one or two cases, anything beyond that can create diminishing returns from a risk and cost perspective.

Subscription won't be the chosen approach in every situation, but, based on experience, it provides the best foundation for aligning software price and value, and helps keep software vendors accountable for customer's ongoing success.

Posted by Amy Konary , VP, Software Licensing and Provisioning IDC

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