Pricing and licensing of software products and services : a study on industry trends

Abstract

The software product business reached the $150 billion mark at the end of 2005. The pricing and licensing of new products, maintenance services, services and service maintenance have become an important strategy to deliver smooth and steady revenue growth. The main objective of this thesis work is to observe the trends among various revenue prospects such as product sales, maintenance sales, service sales and service maintenance sales revenue. Both qualitative and quantitative analyses are pursued to achieve the research objectives. The software industry has gone through several transformations from its debut. Initially, it started as service-oriented industry and then transitioned into a product-oriented industry and is currently transforming into a hybrid of both product and service industries. Just as the industry has undergone from a service to a product to a service (more like a hybrid) oriented industry, so too has the product licensing and maintenance licensing scenario been changing. Perpetual licensing has established its strong presence from the very beginning. While both single user and concurrent user licensing models were standard license offerings, concurrent licensing has been eliminated from the enterprise application segment. A usage-based licensing model is gaining popularity but perpetual licensing continues to be the preferred one. Software firms sell a lot of products early on and fail to keep up the same rate of new sales to new customers. From the regression model, it was observed that the product sales as a percent of total sales decreased by 2.6% each year. As the firm grows older, the firm's rate of growth of product sales decreases. Also, product sales as a percent of total sales increased by 0.88 % for each percentage increase in growth of maintenance sales.

(cont.) Software firms are providing various contents that are included in the maintenance service. Maintenance discounting occurs but not comparable to new product discounting. Fix-time promise in maintenance rather than just the response time commitment is an emerging trend. Software firms are pushing premium maintenance services along with subscription-based licensing offerings. It was also observed that maintenance sales as a percent of total sales increased by 2.1% each year. Also, the maintenance sales as a percent of total sales increased by 0.42 % for each percent decrease in the growth of product sales. At the very early stages of the firm, rate of growth of maintenance sales is low and increases as the firm gets older.