Shift to Cloud Puts Software Pricing Pressure on the Channel


One of the downsides of the rise of cloud computing from a channel perspective is that there is a lot less flexibility when it comes to software pricing.

According to a new report from PwC the shift to cloud computing has two downstream effects on software pricing. The first is that software vendors are finding that delivering software-as-a-service (SaaS) in the cloud is not as profitable as selling on-premise software. The second is that SaaS makes it a lot easier for customers to buy the exact number of licenses they need in any given month; thereby eliminating the tendency to overprovision the number of licenses a customer needs when an application is deployed on premise.

According to Mark McCaffrey, global software leader for PwC, the net result of deploying more application software in the cloud is a lot more transparency into the terms and conditions associated with deploying application software.  PwC says the mix between on premise and SaaS application software revenue for the top 100 global software providers in 2011 stood at $237.3 billion and $26.2, respectively. While on premise software clearly still dominates in terms of volume, McCaffrey says that gap will have closed considerably in 2012 and even further still in 2013.

McCaffrey says key challenges for software vendors include figuring into the cost of future upgrades into pricing because it’s not possible to increase user pricing during the life of the contract. Worse yet, competition is more fierce than ever because the cost of switching from one provider in the cloud is substantially less than it is when software is deployed on premise.

Overall, these shifts have significant implications for the solution providers that have historically counted on the flexibility of application software pricing to either make a deal more attractive to a customer or, more likely, make up for razor-thin hardware margins. As more software moves into the cloud McCaffrey says the profitability pressure on vendors naturally starts to extend out to their channel partners, much of which is reflected in thinner commissions that are extended out over the life of a multiyear SaaS contract.

When you consider the ramifications of all these changes McCaffrey says it becomes apparent that vendors and their channel partners alike have fewer levers to push in terms of pricing, which means there needs to be a lot more discipline in place because software sales in general have become a lot more transactional.

Ultimately, the place the channel is most likely to make money in the cloud is integrating applications. The value of any given application is in direct proportion to the number of other applications it is integrated with. Most SaaS applications wind up further aggravating a chronic problem IT organizations already have with conflicting silos of isolated data. The good news from a channel perspective is that each new application in the cloud creates a new opportunity for the channel to solve that problem.

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