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By Laurie McCabe
January 30, 2004
In the beginning, when ASPs catered to the emerging dot-coms, flat-rate, per-user pricing was the norm because it was the simplest, easiest way for ASPs to bill for their services. The fact that their main customers were small, fast-moving companies desperate to outfit themselves with a virtual IT department in the shortest time possible made that approach particularly practical.
|“Enterprise customers generally require pricing models reflective of their diverse needs and desire for transparency and control of the services they pay for. Generally, the larger the customer, the greater its desire for customization.”|
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Flat rate, per-user pricing was also the only way ASPs could really bill for their services, anyway, since complex billing engines tailored to their specific needs had yet to be developed. But all that is changing, which is proving to be a benefit to both customers and ASPs themselves.
Giving the Customers What They Want
Now things have changed and many of those dot.com dynamos are distant memories. Surviving ASPs have revaluated pricing models based on what today’s customers want instead of what is easiest to implement.
To do this, they’ve had to take a look at what they are selling, what it costs to deliver, who is buying and what those customers really want. For some, the result is pricing models with complex structures that more realistically reflect the services they represent; for others, simplicity wins out and flat rate, per-user pricing remains.
The bottom line on pricing seems to depend on two factors: complexity of the application offered and size of the customer using it.
If the software is particularly complex like an SAP enterprise resource planning (ERP) system or the professional accounting package offered by Intacct, what you find is a pricing system that, like the offering, is customizable and granular. Simpler offerings, like a salesforce automation package or an e-mail program, still appear to be best-suited for the flat-rate model.
This is not to say those offerings wouldn’t also benefit from a granular, or a la carte style, model, Dave Thomas, founder and CEO of Intacct, told ASPnews. As a customer of ASP Salesforce.com, Thomas said he would sign up more of his employees if Salesforce had a more granular pricing model with different levels of access and functionality.
“Their missing out on a fairly significant amount of revenue because they don’t have an ‘atomic’ pricing model,” he said.
Pricing for size basically equates to customer size. Enterprise customers generally require pricing models reflective of their diverse needs and desire for transparency and control of the services they pay for. Generally, the larger the customer, the greater its desire for customization.
It’s Complicated — It’s That Simple
Of course, boiling down something as complex as pricing into two categories only serves to belie this complexity. Every company that employs a given type of pricing model, be it per-user or strictly a la carte, seems to modify it one way or another to meet its particular needs.
Take Intacct, for example. Two years ago, it charged a flat rate of $49.95 per user, per month (PUPM). Today, customers pick and choose only those services they want from an a la carte menu of more than 27 offerings.
Since finalizing the implementation of this model in the fourth quarter of 2001, Thomas said he has seen business double not once but every quarter since implementation. Part of this is, of course, due to things like word of mouth, but new customers have also been signing up because of the pricing model.
“I know specifically of channel partners who brought clients on because our pricing model met their needs,” Thomas said. “And, had we kept our existing price model, we never would have gotten them.”
Compare this to Corio, another ASP industry veteran, that offers enterprise class software from SAP, PeopleSoft, Oracle and Siebel. It also charged a flat rate in the early days. At $650 PUPM, theirs was a bit pricier than Intacct but the model was the same. Over the last 18 months, however, Corio has also abandoned this model in favor of one that reflects the changed nature of the market (no more dot-coms to cater to), customer expectations and internal costs.
Corio uses a model reminiscent of McDonald’s, but where services instead of a Big Mac and fries are bundled together based on the company’s experience with their customers’ needs. Corio’s offerings are now based on size: small, medium or large.
To cover the expense of the unexpected (a major problem with early ASPs), Corio also charges for events, such as major software upgrades, that fall outside of predetermined service guidelines. In this way, customers are encouraged to do things based on a schedule and Corio doesn’t get stuck rearchitecting customer’s systems.
“What we’re trying to do is get our customer’s processes operating in the most economical way so they can save money and we can reduce cost,” John Ottman, Corio’s executive vice president of Worldwide Markets, told ASPnews.
Whatever Works Is Right
At Concur, a time and expense management indedpendent software vendor (ISV) that cracked the mid-sized market with its ASP offering and hosts and delivers software for enterprise clients, pricing has also evolved to reflect a changed market and customer demands.
Because its offering is not as complex as Intacct or Corio, Concur has opted for a pricing model more reminiscent of PUPM, but still reflects its customers’ desire to have more control over the monthly bill.
After paying set-up fees and entering all potential users into the system, Concur’s clients buy a certain usage level, say 100 employees. If more than 100 employees use the system, the company is billed for just the overage. If fewer use the system, the company is billed for 100. There is only one extra service a company can buy and that has a flat, monthly rate associated with it. Or, if they want, customers can buy license and pay Concur to host the software for them. Whatever works.
“We’ve really tried to look at what is the best way to serve the customer,” Elena Donio, Concur’s vice president of Worldwide Marketing, told ASPnews. “What will they tolerate and what is an overall fair and equitable model? We’ve built the appropriate processing around that.”
Tools of the Trade
Aside from meeting internal and external demands, the development of more advanced billing engines have spurred change by giving ASPs the capability to charge in creative ways, Scott Swartz, president and CEO of billing ISV/ASP MetraTech, told ASPnews.
The basis for these engines, somewhat surprisingly, has not been billing but security. Companies have long controlled access to applications via authentication layers based on a person’s function within the organization. Using these systems as a starting point, MetraTech has developed a billing engine that can track any number of metrics and bill accordingly.
Still, leading a horse to water is the easy part. Even though companies have the means to develop all manner of creative sales and marketing campaigns, Swartz said he more commonly sees flat-rate based pricing schemes.
What Swartz recommends to his clients is a hybrid model: fixed costs followed by value-added services billed for separately. It’s an easy-to-understand model reminiscent of the phone company. If nothing else, this may help close a deal or two — something all ASPs need.
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