A short while ago, Josh Greenbaum and I had a lively conversation on the topic of enterprise software pricing. The full audio is above.
I'd asked Josh to speak with me because it struck me that his story titled Customer Success, Vendor Empathy, and the Problem of Extreme Heterogeneity represented an excellent jump-off point, mostly when set against a recent pronouncement by Bob Stutz, President of Engineering and Operations for SAP Customer Experience that the industry needs to rethink its approach to pricing. Since then, Stutz has asked why customers have to pay for subscriptions from the moment they sign the contract and not when they start to consume services. Those are bold statements from one of the leading figures in the enterprise software market.
As always, when two analyst types get together, the conversation takes detours, including one of Josh's favorite topics - how Microsoft Teams sucks. But more of that later.
I kicked the ball into play by referencing conversations I've had with vendors where not a single one has talked about pricing in the context of the pandemic. Plenty of the vendors have talked about providing extended terms but no-one wants to give up the top line. Josh's reply nailed the argument:
At the front end, the vendors are talking very strongly about customer centricity, customer success, they are making all the right moves, at least verbally. In the back end, they're still largely built on a model that absolutely for the public companies, in particular, requires utter subservience to the quarterly cadence of Wall Street. (By contrast), if you look at Zoho, they've done a really good job of saying as long as we are private, we have control over our destiny and our customers' destiny and they are one of the radicals, who've changed pricing in a pretty appropriate way...(For the large public companies) I don't see how that's going to happen without a lot of pain.
Josh's argument is well made. Wall Street is only interested in one thing - growth. Everything else takes second place. In response, vendors have danced to that tune, creating a narrative where the sun is always shining with no limits on where growth can go. that's unrealistic but then when you're looking at one of the longest bull runs in history, it's easy to understand how memories fade.
But as anyone in business will tell you, economies are cyclical and that what goes up must come down - at some point. To make matters worse, the current crop of investment analysts have little interest in what makes a software company tick. It has no idea about the need for R&D investment, nor the ever increasing complexities involved with products as they mature. It's a nightmarish dance from which it is difficult for vendors to extricate themselves once they're on the growth bandwagon.
That's not the case for privately held companies and especially those that have eschewed the siren song of the VC market. Zoho is squarely in that category.
For those that don't know, Zoho introduced analysts to aggressively priced bundles in January 2017. Today, you can buy an 'all you can eat' bundle of some 40 plus applications for $35/user/month. That's an order of magnitude below the rest of the market but more importantly, there is enough in the bundle to satisfy the needs of many customers. Could they scale to meet complex requirements in large businesses? No. But Zoho can reach many millions of businesses and over the last year has drawn consistent warm praise from analysts, and not just for price. This from Brian Sommer for example:
They really seem to know them well. We got lots of unrestricted access to them at this event and will likely run into piles more at the Zoholics show in a couple of months. Each one I met at this event said they like the products and their decision to go with Zoho.
Back to the plot. Referencing SAP in particular, about which I write more than most, I suggested to Josh that much of what they offer falls into the commodity bracket and should, therefore be priced accordingly. Although I never stated it in these terms, I liken certain aspects of enterprise software in the same way as I look at power consumption where there is a fixed charge which ostensibly covers the capital depreciation of the assets involved, coupled with a usage based on the way I consumer power. Josh pushed back on that with the following argument:
Yesterday's innovation is tomorrow's commodity or today's commodity. As the vendors products become more commonplace and therefore, commodity like, the question is, Is this how the customer wants to consume it? Or more? Precisely, does the enterprise software customer want to be treated like a commodity customer, because when you look at how commodity pricing creates commodity experiences, most of us don't want those kinds of experiences. We want enterprise experiences. We don't want to be treated the guy buying pork belly futures, we want real customer service. So, I think there's that problem with it. But I also think at the end of the day it's very complex. And in particular, to really throw the question out, what are you paying all that maintenance for? When at the end of the day, you're still paying more, and what you thought would be free is something you have to pay for again. And, how did you get a benefit from the commoditization of the stuff that was a premium product?
It's an interesting argument and one that has distinct merit in the rarified world of on-premise enterprise software which is orders of magnitude more expensive to acquire, implement and maintain than its SaaS counterparts. Here, part of the problem is in the 'extreme heterogeneity' to which Josh refers coupled with the sheer complexity of implementations that have been heavily customized, Are these truly commodities when viewed through that lens?
I would argue that in those scenarios, CIOs should be asking themselves why, in 2020, are those complexities present when, if anything, the pandemic has shown us that the legacy architectures, built as they were for relatively stable environments work against the interests of the business. Is it not time to revisit those with a critical eye that seeks to extract cost and redirect to more pertinent and value adding solutions? And here we come to the nub of the problem as Josh sees it. While no-one this ks that software could have solved the immediate impact of the early stage pandemic, it has forced CIOs to question where they're getting value and how that fits into the notion of end to end processes of the kind implied by talk of process integration.
Sure, there are process owners but are they the buyer, do they have insight into end to end processes, do they have the power to make decisions? I'd argue that companies are just as siloed as the vendors and systems integrators, so you now have a situation that has evolved over the years and is incredibly complex. This drives a whole other discussion about what I call the culture of mediocrity. It's okay that this stuff doesn't work very well. It's okay that my projects don't get done on time. It's okay that we have this mess because it's job security because that's how we've always done it. Because, because, and at the end of the day, this is the other side of the productivity problem.
That's a pretty hard indictment but one that reflects how the entire buyer, vendor, ecosystem works and for which there are no easy answers. And it only gets worse. While we briefly referenced the impact of the customer saying good things about their vendors, Josh raised the point of managing the hyperscalers. In his view, this should be prime turf for the enterprise app vendors because customers have multiple hyperscalers in their portfolios, so why try to force one or other down the customer's throat. Far better to take ownership of managing the landscape to unify technology behind process improvement and integration. Again, it's an exciting concept and one that is worthy of further pursuit.
As our conversation drew to a close, it was clear that while there are plenty of ideas on the table, there are no clear pathways to conclusions that could be put into the market. At least not effectively and not today, Even so, that leaves open the question - how does the enterprise software ecosystem of vendors, buyers and SIs balance out this equation such that buyers do see value for which they are willing to pay while at the same time having vendors willing to acknowledge the commodity nature of much that's in the field.
What do you think? Is this a conversation you want to have with your vendors? If so then how might you proceed? What kinds of measures do you think should be applied in assessing fair reward?