Thursday, October 13, 2005

The Price is always wrong, and will be.

Software vendors have always been criticized about the way they price their product. The very nature of their product development (which is so unlike manufacturing mass consumption items - here they create the product just once, marginal costs for additional copies are practically zero) coupled with the changing nature of the industry have meant that there is no right price for software, and neither is there a consistent pricing policy. This point is supported by Nick in his latest post. However, some of the things mentioned there don't make sense.
"Server software, for instance, is typically priced according to the number of processors that the software runs on, regardless of the actual utilization of the software. Applications tend to be priced either per processor or per user, again independent of how intensively the software is actually employed. " (Nick's Blog)

The fundamental premise to this discussion is whether software is a product or a service. If it is a product, you can never arrive at the right price for it. Imagine buying a 100 BHP car and paying for only 60 bhp as you cannot use power beyond that. Imagine buying a jeans on per usage basis rather than the usual cost basis. Imagine paying for a villa only on the basis of the number of rooms you occuly regardless of the number of rooms that exist. Imagine buying a Intel processor and paying only 30% of its price as that's the whole computing power you will ever use in your life (I guess even 30% is an astronomically high figure). This kind of fantastic pricing has never happened, and I wonder if it will ever be. By the way, the last example is what should happen in the "right" scheme of things as per Nick.

Once you consider software or server hardware as a product, the price is wrong, and it will always be. We simply haven't evolved to pay for products on a per usage basis, and that is true since time immemorial, and I wonder if this will change due to software or internet, or for that matter, open source.

If software is a service, yes you can charge for it on a per usage basis, like the phone, or electricity. Now that's an interesting thought:

"Ultimately, large networks (or "farms," or "grids") of physical servers will be virtualized, with their combined capacity allocated to various applications based on moment-by-moment shifts in demand. The usage of every piece of software, moreover, will be able to be tracked precisely. At that point, all the traditional methods of software pricing - whether per-processor or per-server or per-user - go out the window. Software fees will be based not on generic theories of usage but on actual usage. You'll have software meters just as you have electricity and gas meters." (Nick's Blog)

Electricity, gas and telephone are good, but wrong comparisons. All of these are mass consumption items that are also needed by businesses as their inputs. They are unfair comparisons for software as a service, as software as a service is not needed by most of the masses for their day to day lives, but needed more by businesses as inputs. I can agree that one can talk of email from Yahoo or search from Google as a software that is a service needed by most, but if you look closely, the premise of discussion in the posting above is server and application software like CRM or Databases, and they are never going to be on the same plane of mass usage as phone and gas. Its only for commercial software that the pricing is an issue, and I wonder if it is ever going to change.

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