The first article in this series points out the plusses and minuses of the different channels software/service suppliers use. Even if a channel partner will worry about such issues for you, it is important for you to understand them.

The conventional wisdom is that software suppliers want to cut out the middleman, avoiding partners such as value-added resellers (VARs), distributors and consultancies, in order to increase their margins. For example, some Microsoft partners are reportedly upset with Microsoft’s policy changes announced in July 2008 at its Worldwide Partner Conference regarding direct selling that will cut into the partners’ revenue stream. Similarly, Astaro is trying to take advantage of new Symantec partner policies. In reality, the leading software suppliers want to do much more and IBM has already made significant changes.

How the Revenue Flows from IT to the Software Supplier

What Microsoft wants its partners to do is to become more involved in delivering software-as-a-service (SaaS — see illustration), which Microsoft calls “Software Plus Services,” both by role and industry.

The reason behind Microsoft’s strategy relates to how revenue flows from IT to software suppliers. Commodity packaged software — delivered for on-premise use “as-is” with a right to use (RTU) license and typically tied to an annual subscription maintenance fee — gets all the press but is actually much less common than its extensive press clippings might imply. Pure SaaS unrelated to a broader business service such as payroll processing is similarly rare. The most prevalent ways you pay for software are via enterprise-unique and service-associated software — built into a business service or a consulting contract. (A fifth and least common delivery method used by the software supplier involves delivering software preloaded on a device/system, often leased or rented.)

The RTU license with subsequent annual fee is preferred by the suppliers for the obvious reason that they get more revenue sooner. But they work via all five revenue models and are happy to deliver their software via whichever model you — their customers — prefer. They approach the revenue issue as follows:

How much revenue do they expect to/need to take in to cover the software’s development/marketing costs?

Can they/should they:

Price it as a loss leader (take a loss on the hopes of selling something more profitable)?
Price it to cost (add a reasonable profit on top of the development/marketing costs)?
Price it to value (roughly related to the cost of doing whatever by other means plus a reasonable profit)?
Price it to whatever the market will bear?

In the end, it costs the software supplier $x to run its business and it has to take it in $x plus a profit over n years to keep supplying IT with software. Whether you choose the RTU/maintenance model, SaaS, as a business service or an appliance or via a consultant is something the market will decide. The x/n calculations still rule.

Previous Page Next Page