More about pricing: open source and commodity services

by admin on April 28, 2009

in Cloud Computing/SaaS,Featured

openbravo1A day rarely passes that I don’t see another pricing adjustment in the saas world. Earlier today I received an email that said:

WorkXpress today launched its customer relationship management (CRM) application for free use by all customers. This powerful new CRM provides businesses an easy to use tool for a 360 degree view of customer interactions while offering the opportunity for full customization of the application and its reports.

Earlier in the week, Pearl produced a revised price list that includes a free option. Tomorrow, a well known CRM vendor will announce price cuts. What’s going on?

Competition for one thing. The global economy may be in the toilet but that isn’t preventing small teams inventing new services, almost exclusively delivered in the internet cloud. Hardware prices continue to fall and Amazon EC2 is setting the pace for on demand compute pricing. One company told me they can fully provision around 2,500 to 3,000 users for less than $80,000 a year. That’s around $2.22 to 2.66 per user per month.I’m sure as time goes on that figure will continue to fall. In part, Google is super profitable because it uses commodity computers that it has optimized for its own data centre use.

All of which means that vendors can afford to be more inventive about how they price, where they offer ‘free’ and so on in the knowledge that paying customers will be able to support ongoing development while returning a decent profit. The question as always is about positioning.

Last week at the OpenBravoWorld conference, speaker after speaker said that open source is becoming more popular. Matt Asay’s presentation was peppered with stats showing uptake and the changes in attitude occurring in the business world towards open source. That is hardly surprising given the cost pressures that IT departments face. Open source plus the internet cloud offer tantalizing possibilities on the cost front. You might for instance be able to provision an accounting, CRM or full ERP system in little to no time at a fraction of the list price that an on-premise vendor can offer.

The difficulty for buyers comes in understanding the risks. Few realize though that the skeleton around which the Internet is being built relies on open source, the so-called LAMP stack (Linux, Apache, MySQL and Python – PHP.) In this presentation, Richard Daley argues that open source plus the cloud represents a low risk. I kind of agree. Some open source communities do better than others. The rise of commerical open source will help reduce the perceived risk as companies take responsibility for the services they offer. However, in the minds of many analysts,open source will be restricted to the SMB market because the OSS companies are tiny and therefore have difficulty commanding the attention of CIOs. I’m not so sure. There are plenty of stats suggesting otherwise. For instance industry analysts Gartner believe that by 2010, open source investments will account for 25% of business applications. (see image above)

The communities being built around open source projects are truly huge. Sugar CRM for example has 400,000 users on 50,000 systems for its open source solution. They’ve achieved that in around 5 years. It has taken SAP 35+ years to achieve 82,000 customers though it has millions of users. Last November, the Firefox browser achieved 22% global market share.

Open source may have a long way to go but it is with us to stay. Watch though as pricing models evolve. End users have a lot to gain.

UPDATE: Courtesy of Wayne Schulz, I see Microsoft is offering substantial discounts for switching customers.

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Frank Scavo April 28, 2009 at 10:42 pm

Open source, SaaS, and other alternatives are clearly benefiting from the escalation of maintenance costs by traditional ERP vendors. A price war might be the best thing right now to shake up the out-of-balance relationship between cost and value we are seeing in the market.

Ben Kepes April 29, 2009 at 3:20 am

@Frank…. selling SaaS purely on it's cost benefits is a sure road to disaster. Value add, value add – the mantra vendors should be repeating all the time

Frank Scavo April 29, 2009 at 3:24 am

Ben, I am (and I think Dennis is) saying that someone should start chanting a different mantra as "value-add" for many vendors is pretty much just "higher costs."

Dennis Howlett April 29, 2009 at 5:24 am

@frank – value add is way too overstated. Value Scenarios for ECC6 spring to mind. Show me the value and maybe Ii'll pay – otherwise I'm just buying more software.

The new crop of vendors are showing that there can be hugely competitive price points for the 80% commodity based services that many businesses need. That price (and therefore cost) differential is too big to ignore.

@ben – disaster? For whom and how? On demand pricing is a central part of the pitch in many cases – don't see anyone going out of business yet?

Ben Kepes April 29, 2009 at 5:45 am

@Dennis – watch this space. Or this one –

Dennis Howlett April 29, 2009 at 6:05 am

I read that piece a little while ago but there is no internal logic to the argument that leads to the 90% conclusion. In any event there is nothing unusual about death rates of this magnitude as it relates to tech innovators. How that ties to price is a mystery to me.

One of my 'golden oldie' questions in evaluations is about vendor viability. For that one in the context of open source – see what I say tomorrow on ZDNet.

Also recognize that as many of the vendors are tiny, they can manage their cost profiles far more easily than the majors which have structural issues.

Finally, if you look at the history of computing you can see that many of the world leaders we see today were born out of recession – Microsoft and Apple being the two standout examples. Who's to say it will be any different this time around? If anything, the conditions are forcing emergent vendors to move over to OSS as a way of containing dev costs.

Bob Harper April 29, 2009 at 10:40 am

It's my take that the new providers are using old pricing with a little twist of no upfront and monthly fees. If you're a small business paying for different systems £15 a month here and £15 a month there adds up so I see much smaller fees for systems that only do one thing. So, if I did a SaaS bookkeeping system I'd be looking at £5 a month.

There is also the option of using the Google model and allowing paid sponsorship to appear in the system and allowing the end user to pay less! If a financial system did this by linking into "best deal" suppliers then the system could pay for itself.

Dennis Howlett April 29, 2009 at 10:49 am

@bob – there's a lot of truth in that first statement.

Studies have shown that contextual advertising in business applications doesn't work.

Tim Loving May 1, 2009 at 1:13 pm

Dennis is correct that the two most critical factors affecting pricing are increasing competition enabled by SaaS technologies and the ability of SaaS vendors to be inventive with their pricing policies.

The global economy IS in the toilet. It will remain there for the foreseeable future.

Pricing will continue to decrease, new vendors will come onto the market, and some current vendors will go out of business. Pricing is and will continue to be a VERY important factor for customers.

But there are a bunch of other metrics that are also important to customers, such as scope and quality of content, flexibility to adjust to changing business conditions, and, not least, vendor survivability in a much tougher, more demanding environment.

The underlying dynamics of the free enterprise system haven't changed – the speed and scope of market changes are visibly accelerating because of the conjunction of a major step-change in technological capabilities with the deepest and most widespread recession since the Great Depression.

In such a yeasty fermenting brew customers need to understand the risks of being locked into vendor-proprietary environments. Open source and open standards and commodity services will become increasingly important as gritty competition starts grinding away at vendor margins.

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