Software commodification

by admin on February 12, 2009

in Cloud Computing/SaaS,General

John Stokdyk contacted me the other day in a hissy fit about Sage Instant Taxation pricing and how he felt he’d been led down the pricing garden path. Today he writes about it making the point that:

If journalists have to fight to get a simple quote for pricing, I always wonder what it must feel like to be treated that way as a potential customer.

Heh – welcome to the wonderful world of software pricing aka the nickel and dime show.

Accounting and tax software is now mature. That means there is little differentiation in the market when comparing most of the major products. As with all products and services that mature in this way, commodification sets in. Simon Wardley provides a useful set of definitions around this topic:

  • Commodification (mid to late 1970s, Word) is used to describe the process by which something which does not have an economic value is assigned a value and hence how market values can replace other social values. It describes a modification of relationships, formerly untainted by commerce, into commercial relationships.
  • Commoditisation (early to mid 1990s, Neologism) is the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition, from monopolistic to perfect competition.

As a brief aside – I thoroughly recommend reading Simon’s blog. It contains many of the clues as to why the open source, cloud computing and saas markets are inevitable consequences of what we’re seeing occur in software development. As professionals you should also see this as a metaphor for the direction in which many accounting functions are heading.

In our case, commodification has the effect of applying price pressure on the market as a whole. Vendors kick back by trying to tease out small pieces of functionality as ‘different’ and therefore worthy of premium pricing. Or – as in this case, they simply move the goal posts on numbers of user.

There are some interesting comments to John’s piece, reflecting the frustration that buyers experience. However, I would argue that saas pricing is much more transparent. Go to many of the providers and you’ll see a clear grid that sets out exactly what you’re paying for, The difficulty – which I think John has slightly misunderstood in referencing my thoughts – is that the evolution of business models makes a straight price comparison between saas providers somewhat awkward. Even then, I believe you have to parse pure price in a different way, evaluating a raft of other factors into the equation. That forces you into considering a value based model which I believe is more useful than simply looking at the commodity elements.

For more on this topic, Jason Rothbart has a useful insider’s view of pricing conundrums at Read Write Web

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