Businesses are paying less than ever for software. This is why

Profile picture for user Raju Vegesna By Raju Vegesna June 11, 2019
Summary:
Software is going the same way as the music industry and companies will need to adopt new models to respond to this market shift. Zoho's Raju Vegesna explains all

Vintage neon arrow sign showing free against blue cloud sky © J.D.S - shutterstock

Software companies adhere to the same external pressures as businesses in nearly every other industry. People tend to think that software vendors behave erratically and price arbitrarily, emboldened by larger-than-life CEOs with missions of shaking up the status quo. And sure, in some cases this has been true. More often, though, consumer expectation, competition, and technological advancements are the primary drivers of disruption across all industries.

Recently, these factors have contributed to the commodification of individual software applications. Prices have been driven lower and lower every year such that piecemeal software pricing is no longer a favorable area for vendor differentiation. It's only a matter of time before software becomes free - a de-facto add-on to comprehensive suites and industry-specific verticals.

In the early 2000s, email software cost between $30 and $40 per user for businesses. Now, companies can expect to pay around $10 per user per month. Fast-forward a few years, email won't cost a thing, rather it will be rolled into a larger platform and offered as a convenience.

Enterprises want more than software alone

The complexity or user-adoption of a particular application does not necessarily indicate how much a company can charge for that software. Email is, in fact, a fairly complicated tool both to build and maintain, yet email pricing nowadays reflects the opposite. Chat is another example of this phenomenon. Despite their increasing sophistication and functionality, companies have struggled to monetize standalone chat platforms - often offering them as free email add-ons instead.

Today's enterprises don't want to pay for individual software applications. It's clear. Instead, they expect to pay for software plus service plus support plus convenience plus security.

Vendors have recognized this industry shift, if slowly, and are developing software or acquiring companies to fill in any gaps in their software offerings. Among large enterprises, where acquisitions are too costly, businesses are relying on close partnerships to extend the depth and breadth of their services. (Adobe, Microsoft, and SAP's Open Data Initiative, for example). Companies that have already built out multichannel platforms that can handle myriad business tasks across departments have a leg up as the industry moves in this direction.

Look at the music industry

A good way to understand what's happening in software is to look at the music industry. Disruption has affected pricing and distribution models in the music business in the much the same way it is beginning to in the software industry.

Modern music distribution began, like software, with a physical product. Music was sold in the form of LPs, cassettes, then CDs. These commodities were expensive for customers and lucrative for those who controlled the means of production. In 1997, the first digital single was sold on the Internet, irreversibly changing both the price and distribution model for the industry. (For anyone interested, the first digital release was Duran Duran's Barbarella - not a good song but a trailblazer in one respect).

Once music became digital, piracy abounded. The same of course was true in software, motivated in large part by high prices. Now with streaming services, the MP3 download/upload business model has been disrupted. Like much of software, music is by-in-large stored, hosted, and made available to customers from the cloud.

For products distributed on the cloud - be it software or music - customers aren't actually buying or owning anything tangible. This is obvious. Instead, they are being given access. It's that difference that has led to subscription models. Whether for business software or music services or streaming video content, customers are paying for access and ease of consumption (on the consumer side, the platform with the easiest purchase and consumption model tends to win - for example Amazon Prime, Kindle, or Netflix). Now that access has been monetized and competition is driving the price down, the next level of value for the vendors is customized journeys. (Think customized software industry verticals for, say, commerce or marketing, curated playlists, or exclusive content).

The value of software lies in what it enables

The cause and effect of this shift in the software industry is the devaluing of the software applications themselves. It's no longer cost prohibitive to develop software. Two people in a garage can create a CRM with little-to-no overhead. At the same time, do those developers have the scale to include on-site and remote support, or industry-specific configurations? Can they easily add/integrate an e-commerce component to an ongoing software subscription - or is their software too proprietary?

In the music business, it's a buyer's market. Customers are the beneficiaries of a disrupted industry. The bands, the labels, the distributors, even the streaming platforms of today will all continue to struggle to turn profits if they don't pivot. This is now true of software. Software itself has a lower premium today because the value now rests in what it enables businesses to do. The future titans of the industry will be those with the foresight to continue to develop new business models that keep pace with heightened customer expectations, wrought by changes in technology.