Sunday, January 27, 2008

Complex Software Licensing drives companies to SaaS

I've blogged previously about how SaaS pricing should be as simple as possible and that SaaS is generally associated with a simple and easy to understand subscription based pricing model. There is good reason for this.

I've heard talk of including annual maintenance, upgrades and server hosting as invoice line items in customer billing. Which just adds unneeded confusion to something which is elegant in its simplicity.

Why should you keep it simple? Because you gain a primary competitive advantage over traditional software licensing.

A recent article in InformationWeek , titled "Software Licenses Are Too Costly And Complex, Survey Says",

provides evidence from a Forrester report, that customers are frustrated by traditional software vendor's licensing policies.

The article writes that

Forrester recently surveyed 25 customers of large software companies and 215 business and IT professionals. Eleven of the 25 big software customers complained that license agreements are too complex and maintenance fees are too high, according to the report by analysts Ray Wang and Elisse Gaynor

and finishes with

But Forrester is optimistic about the future. Growing interest in software as a service will force providers of traditionally licensed software to change their ways. The pay-as-you-go SaaS model "will give business owners a taste of streamlined, more easily consumed licensing," Forrester predicts, noting that SaaS also typically comes with a bundled license, maintenance, and upgrade package. Customers will "gain more interest in and grow more vocal for simplistic and holistic approaches to usage-based pricing agreements," the analysts predict.

As a SaaS vendor, it may be tempting to try to pass on costs of server hosting and R and D to the customer but ultimately that is unnecessary. In fact you dramatically increase the risk of driving customers away and increasing your "churn".

As more customers sign up and renew the following year,the SaaS Multi-Tenancy benefits that we are all familiar with, ease of upgrading software, efficient server utilization, reduced support requirements, reduced cost of ownership, all eventually drive marginal costs of new customer provisioning right down to an insignificant amount.

The Forrester Report is proof that customers want the simplified approach of SaaS pricing.