An argument against license enforcement

This may seem weird as I’ve been talking about pricing and license metric development.  However, we have not yet talked about enforcement. 

To software companies, license enforcement protects the bottom line.  It prevents rampant, “entrepreneurial” software distribution throughout their customer base.  Keep in mind that this discussion isn’t a one-size-fits-all scenario.  A major enterprise software provider may choose to enforce a license differently than a single-user shrink-wrapped software provider.

To customers, software licensing is a way of steering clear of the legal issues surrounding "viral license expansion” that can happen as co-workers share their productivity practices. 

It’s simply risk avoidance – policy triumphing over value to the organization.  IT departments go through elaborate means to “control the desktop environment” of their employees both for ease of management and for license enforcement.

Viral license expansion for fun and profit

If we take away the legal and negative revenue implications of letting a software package roam free-range style throughout an organization, the result of getting more eyeballs on your product can be compelling to both parties.  This is especially true if your software has an entrenched user base in one specialized area of a company, but could bring significant value to other areas of your customer base.

When Licensing Metrics Must Change

Everyone knows that technology changes quickly.  So it’s surprising (at least to me) that licensing metrics for software are so difficult to change.  Purchasing contracts, license agreements, and license enforcement tend to lag technical milestones.  Sometimes this is a good thing – for instance, everyone waited out the predicted move to 64-bit servers during the development of the Itanium processor.  At other times, licensing metrics are not compatible with IT practices that develop due to technology – you license per-Ethernet port and they buy per-device.

Consumer packaged goods don’t usually have to keep pace with technical changes.  Cars are licensed per unit, not per cylinder, seat, or window.  In many ways software is licensed “per cylinder” which makes it susceptible to fundamental changes.  Think of the impact hybrid technology or turbo chargers would have on a per-cylinder vehicle licensing model during the current green movement.

What to disrupt when you’re disrupted

Pricing topics round up

It’s time to look back at the ground we’ve covered in order to establish the road ahead.  In a series of strategy posts, I talked about the fact that if you don’t know where you’re going, any road will get you there.  I also said it was important to have a sense of purpose and continue to review the goals that you started with in order to see if they’ve changed.

Let’s review what has been covered so that readers can easily catch up with anything they’ve missed and also to plot the next post.

Human behavior

It’s only natural to look for the best deal.  That’s exactly what happens when you get down to brass tacks with any business negotiation.  Humans treat everything with lots of variables as a game.  We like to play with graphic equalizers because we think we can make our music sound better when we have a greater degree of control over the gain of each frequency band.

Pricing metrics and the customers that suboptimize them

There are many truths in life.  If it didn’t sound so geeky and pessimistic, I would add to the list “customers will always suboptimize your product based on your metrics.”  It’s not very catchy.

I previously wrote about points to consider when choosing your metrics.  It was by no means exhaustive, but it did have a “salesy focus”.  That’s because your sales people play a vital role in your pricing and licensing scheme both before it is rolled out and when their boots hit the ground (and I saved one harsh reality for the end of this post).

Additionally, I brought up a few “rules” (or at least observations I’ve discovered) about choosing your metrics.  I could have added suboptimization to the list, but I’ve found there are some finer points to consider about this psychological pattern when it comes to your software’s sales, adoption, deployment, and expansion.

Pricing and the metrics that matter

Previously, we engaged the topic of the metrics you might choose as the basis of your pricing and how the evolution of technology will disrupt your well-laid plans.  This is especially true in software and hardware, but can also be found in other areas such as telecommunication or Internet services.

Businesses tend to manage new technology or legislation very closely.  Executive positions and departments rise up around a new technology and then get re-focused as that technology is commoditized.  Think about what “IT” means today vs. 20 years ago.  It might have been called IS, MIS, or “Information Systems” back then.  The role of IT used to pertain to mainframes, networking etc. but has grown to encompass cell phones, voice over IP services, laptop support, managed software deployments, cybersecurity etc.

The government can create new positions involuntarily within a business as well.  There are now “Chief Compliance Officers” (i.e. “guy in charge of going to jail”).  But, as these roles become more habitual and the variability or costs become reduced, these roles in an organization can shift or dissolve.

Licensing metrics: Rules Patterns

This is a set of observations I’ve collected over the years in studying and theorizing about what metrics to use for software pricing and licensing.  The only thing that can help deal with technological or market evolution is have a plan around changing your licensing scheme.  When you have those discussions, keeping these things in mind may help.  Here we go:

Pricing, metrics and evolution (#3)

So far I’ve talked about how pricing is a mix of several elements which involve math, science, intuition and emotional intelligence.  At some point, these things come together and you have to divide up what you’re selling and assign a suggested quantity of money that should be exchanged for each quantity of your product.

For some products, sizing or metrics may be determined by the market standards (e.g. existing products, packaging, shelf space) or by some other decision designed to garner a net impression (e.g. 100 calorie snack packs of food or beverage).  Consumer packaged goods have a whole pricing paradigm unto themselves versus pricing a “virtual” product or service.

I’ve heard that individuals will typically undervalue their own skills or services when they ask for compensation versus letting the recipient pay them.  However, I don’t believe that’s true for business transactions.  Especially when it comes to software, cable TV, and cell phone plans. 

Certainly in the software sector, many customers believe that the pricing is out of line with the value they receive.  Perhaps that’s because the licensing terms don’t match their expectations very well.

Human nature and software pricing (#2) – let sales do their job

Deep in the process of pricing, in the midst of the miasma of spreadsheets, whiteboards, and scenario development, the pricing master will teeter on the edge of sanity.  Combinations of customer situations, past corporate agreements, and product development plans will swirl and form into transient clusters of pricing policy and licensing metrics that must be analyzed and evaluated.

Let’s talk about that for a second because it sounds like I’m out of my mind.  But we’ve been there… the vortex of information that surrounds pricing can overwhelm the senses and make good ideas indistinguishable from disastrous ones.

While I do believe that to know pricing is to know madness at times, pricing will always drive you to that point if you forget this simple rule:

Let sales people do their job.

Sales can be your ally, but you have to involve them in a specific way in order to bring about the best results for you, the company, and their commission.

Human nature and software pricing (#1)

For over seven years, it was my responsibility to price a complex software product.  I didn’t expect it to be a place to learn about the psychological interplay of rules and human relationships.

Over the next several posts, I will share what I’ve learned empirically.  No, there is no pricing magic wand.  However, if you’ve searched the product management literature and the Internet, you’ll find that very few people have discussed pricing anything more complex than single user software licenses or golf balls.

So let’s begin.

Pricing jujitsu and your evil twin

The customer is not your adversary.  Yes, you are trying to extract money from their wallet.  But your job is to quantify the value of your product so your sales force and customers can come to a long-term, mutually beneficial agreement.

This is why complex software never gets sold for list price.

Software maintenance: what have you done for users lately?

I have several friends on both the vendor and customer side of the enterprise software fence.  The vendors always rely on a blend of license revenue and maintenance fees to pay the bills.  Sure, they do some service (consulting, installation, etc.), but the ratio of license revenue to maintenance revenue is the yardstick by which the health of a software vendor is measured.

In today’s economic times, I’ve heard many of their customers talk about going on a “maintenance holiday” (a “version staycation”?) in order to cut costs.  After all, many software applications and infrastructures that are in place today aren’t going to get upgraded in the coming 12, 24, or 36 months unless there is a mission-critical feature added or addressed in a vendor’s product.

To prevent this, some vendors have put in place a measure of protection.  Sometimes these show up as maintenance-lapse penalties which are more of the “stick” side of the balanced “carrot and stick” equation.  This usually results in user grumbling.

A user-mandated, semi-collaborative approach comes from SAP’s base.  In response to its users, SAP has created a practice to measure the value of their maintenance contract with customers in order to justify the expense.  It will be interesting to see how that story develops.

But there may be a more proactive way to go.

Vendor revitalization strategy: remain relevant

As the SAP example suggests, the rules are changing in more places that just the economy these days.  We’ve watched the government provide stimulus packages to revitalize the economy, but for most of us, the benefits will be fairly intangible.  I believe vendors have the ability to make a tangible difference to their users by creating a stimulus package of their own.

Vendors should adopt the three R’s: be responsive, relevant, and required for success.

Clearly the best way to do this, if you’re a vendor, is release something so compelling that customers will flock to it.  But not all vendors have the next-generation iPhone or Palm Pre up their sleeve.

Another approach is to adjust licensing policies to encourage wider adoption of a product or further “adhesion” to the platform. Continued customer reliance on a software platform is like an insurance policy against being “ripped and replaced” (a disruptive act for everyone), or “congestive software failure” (where your product just atrophies in place and is consumed by something else).

You can see evidence of this from Microsoft as they court developers away from the LAMP stack (open source tools).  Over the past few years, they have released very capable, free editions of Visual Studio, SQL Server, and a mashup tool (Popfly) for free.  Most recently they have released SharePoint Designer for free in concert with their open sourced ASP.NET MVC Framework.  This is all to stimulate their developer base and get people in the community to use their tools to make new components like Silverlight into compelling offerings.

Create a hero, be a hero

Out there in user land, the prospects are bleak.  Layoffs and belt tightening may also mean that a vendor’s champions inside a company will disappear.  Once that happens, the vendor’s product could “go legacy” and be the next target for consolidation and “standardization” (i.e., migrate to your competitor’s product).

Vendors should realize that any team leader within a customer worth their salt will be in a protectionary mode.  It’s a fight for survival.  They will be trying to demonstrate the value of their team to avoid being part of the next wave of cost-cutting measures.

So, vendors, listen up: if users can find a way to replace or prevent the acquisition of a vendor’s software product in exchange for saving their team from layoffs, you can bet that software licenses and maintenance fees will be the first to fall.  I’ll post on that later.

This is why I’m calling on vendors to invest in becoming the ally of their customers and users.

The buyer persona of a company isn’t enough to address. Vendors that want their maintenance fees paid or their software upgrades installed must take an active role in making their users succeed as well.  Keep those users as your champions and your software will remain relevant.

Vendor stimulus packages

Vendors have ultimate flexibility in this situation.  By working out creative licensing terms or enabling a feature that the customer or user has been trying to justify purchasing, vendors can maintain an active, positive presence at a customer and become part of their economic success story.

Another approach is the help users use your existing product for something that is new and valuable to them.  I don’t mean go build it for them, but pony up the training, webinars, or prescriptive whitepapers and architectures to help their teams build the thing that will be valuable enough to save their jobs AND assure your place in their hearts (and wallets).

It could be true that there are some vendors that are “too entrenched to fail.” But, user and buyer morale is still important to maintain lest that software product become “too entrenched to upgrade.” 

Look for competitive vendors to examine fallow customer bases and create programs to migrate customers away from existing platforms.  In some cases, software that’s difficult to upgrade represents an equal opportunity for replacement to a user.  If a responsive vendor courts a customer and portrays equal or greater value plus a “low switching cost” to the customer, some established players may not be so established anymore.

Economic necessity is the mother of user innovation.  We will see creative uses of products that become “good enough” to replace or postpone purpose-built products.  Let’s talk about that in another post later on.

For now, be responsive, relevant, and required in your customers’ recovery plan.