Current software licensing and sales models are seriously flawed ...
Ask a software vendor about the benefits of Demo, Shareware or other alternative software models and you'll get a few stock answers. It's inexpensive. R&D costs are lower. You can be more nimble. The opposite side of the coin is giving up revenue or not reaching enough customers or reducing the value of your software. Few vendors actually realize the true operational leverage that alternative licensing models offers in development, sales and marketing. The problem is that the traditional software business model is broken. The search for new customers and revenue growth causes sales and marketing costs to spiral out of control. In fact, according to a Goldman Sachs report it is estimated that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000. This quest for additional revenue has created an unsustainable cost structure for the industry - one that doesn't serve vendors or their customers. In essence, vendors spend a lot of money to convince customers to buy, and then charge them a lot of money for the license which covers the additional development, sales and marketing costs. We're charging the customer just to sell to them. Because the cost of a new sale is significantly higher than upgrading current customers, software vendors have turned their sales strategies and focus toward upgrading and maintenance revenue. This approach is severely flawed since development and support costs tend to increase exponentially using this licensing model. Each edition and version of the application increases the complexity of the software. With complexity comes increased support costs and maintenance costs. With the need to fulfill a12 to 18 month maintenance obligation there is less time to recoup initial development investments. Additionally development is asked to support various editions within the code in order to maximize their customer base. Typically three editions are created (with accompanying evaluation editions) from one application; Standard, Professional and Enterprise. This further increases the complexity, number of defects and again results in higher support costs. A better way to license software The demo/shareware selling model turns the marketing problem on its head. Customers can look at, evaluate and review software without contacting the company that sells it. Consider company X. X says, "I want something that does this or that." X locates a version of a product where the marketing material lists features that closely align with what the customer wants. X then downloads it and is using it before the Software vendor is involved. The sales cycle of a traditional enterprise vendor is just too long. It takes several months to get the right sales meetings, convince the CIO, sign a deal, do a pilot - maybe the customer spends a little money to fully evaluate it (with a single production license) - follow it with a beta phase, and the vendor hopes for a sale. Eighteen months later you may get the deal. All along, the software vendor is convincing the customer to buy an off the shelf software product with all of the features that are included (whether they require the full product or not) and development is stretched between fulfilling support contracts, creating customer specific features and attempting to create new features. Back at company X, the CIO is happy with the demo/shareware version. But after using it for a while, begins to wish for documentation, a live-person to ask questions, a phone number for support, and so on. At that point, the customer calls the company saying, "I've been using your product…" Wait? Why did the customer call? EditionCreator allows you to transition your demo or shareware to more limited editions or to gently prompt the user to purchase. Additionally you can add “buy now” functionality or completely disable the product all together. Prompting the user to register after 90 days is an effective method to actually getting the customer to purchase the product. You are not requiring the check, simply getting the customer to register. Transitioning software has never been easier. The software vendor no longer requires a person to do the “follow up” on each download. The software handles the follow up for you. This is a great sales situation. The user already considers the product mission critical to their business. No pilot is needed. The salesperson only needs to convince the user to become a paying customer - not convince them about the value of the technology. This is far superior to the daily or per use nag prompting. Nag prompting simply ensures that customer will not allow the product to become mission critical. Edition transitions also allow vendors to hire a different type of salesperson. At a large software enterprise vendor, the cost of a good sales rep is roughly $250,000 per year. If they are responsible for a $2.5 million quota, that salary alone is 10 percent of the vendor's revenue. This is a fairly heavy percentage and not scaleable. On the other hand, a good telesales rep only makes half of that salary, maybe less. And even if a field salesperson is needed to close large deals, the sales cycle has been shortened from years to months. The end result is dramatically lower sales and marketing costs. Additionally ISV’s can become more focused on support and producing software products. The savings in sales & marketing could be as much as 75 percent. Without the need to pay for large up-front sales & marketing costs, the vendor doesn't have to charge a hefty license fee up front. No more charging the customer to sell to them - the customers will sell to themselves. But how does this model decrease R&D costs? The trick is to reduce application complexity. EditionCreator reduces the amount of development time and code required for each edition produced. With EditionCreator R&D tends to become more effective at testing, bug fixes, and interface/integration code. Development remains focused on the business logic, which is ultimately what customer is paying for. EditionCreator allows vendors to drop the hefty license fees, and reduce the sales and marketing efforts to win those sales while allowing the vendor to be more profitable. The vendor is more nimble and able to generate functionality that helps the customer in turn increase overall market presence. An application which costs $100,000 in license fees and costs $15,000-$20,000 a year in maintenance can be reduced by as much as 15% while remaining profitable. Although the dollars per transaction are lower, the market grows and the operational costs are lower. Editions can be created to sell to customers who couldn't have afforded the product or were not big enough to warrant attention of the sales staff. Maintenance and support remains a recurring revenue source, creating a more stable economic environment for the vendor. The market can grow to massive proportions if costs are lowered appropriately. Look at the success of software giants like Microsoft and PeopleSoft: the market took off because they were able to provide low cost, easy-to-use software. Admittedly, it would be very hard for a very large, public software company to do such a radical surgery on its cost structure. This kind of change doesn't happen to a company that is profitable, even if it should. EditionCreator makes it possible without the increased overhead. There is even more opportunity for startups and mid-tier players to leverage the business model advantages offered by EditionCreator. Alternative licensing models can be realized without increasing development costs.