Tag Archives: pricing

Cloud Computing: Its not just about access from anywhere

Article first published as Cloud Computing: It’s Not Just About Access From Anywhere on Technorati.

Too many extolling the virtues of cloud computing are ignoring its most transformational benefits

Cloud computing has definitely moved into the mainstream. You now see commercials from Microsoft, Cisco, IBM and others every evening on prime time Cable TV. CNBC has created a Cloud Computing Special Report for investors to learn more about it. Even government agencies are now moving to cloud-based solutions.

Unfortunately, one of the most touted reasons we see for using cloud computing – that it provides universal access to data and applications from the Internet – has nothing to do with what cloud computing actually is. This is simply what web-based applications have been doing since the 1990s. True cloud computing offers a whole lot more.

In October 2009, The National Institute of Standards and Technology (NIST) published an excellent definition of cloud computing that calls out five essential characteristics that separate clouds from simple remotely hosted, web-based computing models:

  1. On-demand self-service
  2. Broad network access
  3. Resource pooling
  4. Rapid elasticity
  5. Measured service

I know, some of these terms are mouthful – especially to those who do “live and breathe” technology. However, they remove so much of the work and complexity that has so frequently made management of computing so painful and costly:

On-demand Self-Service (Think “Now”): With on on-demand self-service, you do not need to ask your provider to execute an “IT project” to enable you to use your application (or update it) to support a new business development. You can do whatever you need, when you need it – without the cost and delay of overhead managing your vendor.

Broad Network Access (Think “Convenience”): This lets you work wherever you need, whenever you need – from your work or home computer, netbook, tablet, or smartphone. Traditionally, this was done through browser, to bypass the need to install local software. However, the rise of (cloud-based) App Stores now allows us to install richer applications to access our data – wherever we are, on-demand.

These first two characteristics are what most people think of when talking about cloud computing. However, it is the next three characteristics that make true clouds stand out:

Resource Pooling (Think “Black Box”): Somewhere far away IT people are managing shared, redundant infrastructure across many data centers. They manage maintenance, business continuity, elimination of failures and bottlenecks, etc. You gain all of the benefit of these large-scale investments in time and resources – but without the need to do any work.

Rapid Elasticity (Think “No Limits”): You never have to worry about capacity planning. If you suddenly get a surge in traffic (due to an emergency or unexpected popularity) the computing resources you need are automatically – and immediately – available. You avoid slow-downs, timeouts and outages that waste time, cause frustration and turn away customers.

Measured Service (Think “Value”): Pay only for what you use – and no more. Rather than paying 100% for servers that you only use at 20% utilization, you pay for the exact number of resources you use, when you use them. The ideal cloud providers charge usage in terms that everyday people – not just IT systems administrators – understand and value.

cloudcomputing-180pxsWhen explaining these cloud computing characteristics to those whose “day jobs” are not in tech, I like to use the electricity analogy. When you buy a new television, you do not call the power company and ask them to initiate a project to set up your television. You simply plug it in and begin using it. If you don’t like where it is in your house, you unplug it, move it to a different room, and plug it in again. At the end of the month, you don’t pay for the power company’s generator and labor investments; you pay for the extra kilowatt-hours your television used.

Services that meet all five of these characteristics are so much more convenient and valuable than legacy computing models. That’s why cloud computing has the potential to be so transformational.

How to price new enterprise software products

The enterprise software market is almost always a paid one. So how do you price a brand new enterprise innovation?

sw_px-200pxSoftware is one of those “magical” goods in microeconomic terms: it has virtually no Marginal Cost. So how do you get a customer to pay you thousands—or even millions—of dollars to buy something you can reproduce for free?

If you’re looking for a “magic formula” to calculate the price of your software, you can hit the ‘back’ button. You won’t find that here. Instead, if you are looking for a strategy to establish a tangible, defensible price for an intangible innovation, read on…

STEP 1: Price by the value you create

There are many, many software pricing models. However, at the end of the day, you’re going to have to defend your quoted price. This is easiest to do, if you price based on what your customers value. Figure out what units your customers use to measure value, and then pick a price model based on those units. Now you have Value-based Unit Pricing.

STEP 2: Use ROI to establish your “list price”

Enterprise software purchases are investments in “promised value.” However, it will take a lot of work for your customer to “unlock” that value: they have to get budget approval, initiate a program, execute it without over-runs, integrate it into their business operations, etc. To make it worthwhile, your software will have to provide a large return on this upfront cost—at least 40-50%. If your software cannot do this, it will never clear the triple wicket of business sponsor, IT manager and procurement manager.

Look at the market—and more importantly—what it costs your customers to do the very thing you are trying to automate or improve. Calculate the cost per year and subtract enough for a 40% ROI. Now you have your List Price. (Note: if there is already software you want to displace, price your product to make replacement of it something that yields a 40% ROI. Why should anyone take the risk to buy your product if it is not good enough to do this?)

STEP 3: Use co-development to establish your “maximum discount”

When you go to a new customer with a new product and quote a price, they will immediately ask for a discount (especially if you are new to the market). How do you insulate yourself against this? Establish a fixed lower bound for your software that you can legitimately never price below (at least until 1-2 generations pass and everything changes).

The best way to do this is by using co-development partnerships. Co-development partners not only buy and use your product; they provide added time, people, teamwork and insight to make it better. (This is not only good for them, it is also a path you can use to establish market leadership). Co-development should be rewarded with your Maximum Discount.

Once you have done this, whenever a follow-on customer pushes for a larger discount, you can point out that your co-development partner only received your maximum discount because of the work and time they contributed.

STEP 4: Build your price rate cards

You now have all the tools you need: value-based unit pricing, list price and maximum discount for co-development. You are now ready to give your sales and contracts team all those wonderful spreadsheets to calculate the price of your new enterprise software—at least until the next generation of innovation arrives…

A Few Closing Remarks: Two things to NEVER do when pricing your software

Give it away for free to get the deal*. You will inevitably get enticed to give your software away for free to get a major customer. Don’t fall into this trap. Once you have done this you have established your software truly has zero Marginal Value (not just zero Marginal Cost). It is really hard to negotiate UP from zero. Give away add-ons, charge implementation at cost—do anything—but don’t give away enterprise software for free (*unless you are using a Freemium model, of course).

Demand premium pricing. You may be so proud of your latest and greatest software that you will want charge more than “legacy providers” for your innovation. Unfortunately, unless you can demonstrate—at a visceral level—that your software provides value that no one else can, you have destroyed the ROI value proposition of your product.

Article first published as How to price new enterprise software at Oulixeus