by Martin Veitch

But how much does it cost? Pricing remains a dark art in IT

Jun 02, 2010
IT Strategy

One of the tricky things when writing about the IT industry should be, in theory, one of the simplest. At any press conference for a product launch a journalist will ask, if the question hasn’t already been answered, ‘how much does it cost?’ The responses require extreme caution on the part of the interrogator.

Way back in time, about 20 years ago, HP listed a price for its bestselling LaserJet of £1199 if memory serves. All its biggest rivals followed suit and yet nobody actually paid £1199 because once box-shifters had got their teeth into this and sacrificed as much margin as was wise, the real price was hundreds of pounds less. So the ‘street price’, as we called it to differentiate from the theoretical price, was more like £899.

This was common practice at the time in both hardware and software with oceans of cost washing between real and nominal prices. This led to some odd occurrences with packaged software companies setting sky-high prices (£400 to £500) for new releases of software but virtually giving away old versions and relying on the buyers of the latter to later pay an upgrade fee to get the latest release. Mail-order companies sold previous versions of popular packages for £10 or £20 each and PC makers would often bundle a dozen programs. This reached such a pass that at one point the maker of a very well-known antivirus program shook hands on a deal to put its software on the hard drive of a PC maker. The only remaining issue was the price: ‘how much will you pay me to bundle it?’ the PC maker asked…

Later, ‘average selling prices’ were created in an attempt to provide the prospective buyer with an idea of what they might actually pay but to this day it’s still a tricky business to know the right price, especially with complicated lists of SKUs, grey-market and pirate programs flying around.

But if consumer purchasing is a rum affair it is nothing to compare with enterprise deals, especially software. Software is innately difficult to price because the physical media (disks and manuals, neither of which are always required these days) is dirt cheap to produce and distribute so the price is based on what the market will tolerate and some notional concept of ‘value’.

So enterprise software prices, where they exist at all, are really only a starting point for negotiations – and those negotiations tend to be long, complex and painful. Smart buyers know that leaving things to the end of the vendor’s quarter (or, even better, year-end) will help, as will flirting with alternative providers. On the other hand, software giants that have their code running the critical operations of large firms know that their customers have no real alternative or quick way out.

Software as a service was supposed to change matters through transparent pricing that was easy for all to understand, even if there was a growing suspicion that costs mounted quickly as you added more such services. Now, however, as SaaS becomes in many ways the new norm, analysts like the excellent Ray Wang of Altimeter Group are questioning the way that SaaS vendors are heading. As Wang tweeted yesterday, “More and more contract negotiations show many SaaS vendors acting like on-premise. Getting a bit disappointing.”

And now a major new development stands to change (or at least reveal) the face of government IT pricing picture again: the UK coalition government’s decision to open up on contracts worth more than £10,000 with details made available on a single website. This will create plenty of worry wherever sharp-suited salesmen gather because very often mega-deals are shrouded in complexity, mystery and cover-all numbers. Sunlight is the best disinfectant but that philosophical consideration will be of no assistance to salesmen touting packages ‘worth’ sometimes millions of pounds.