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Amazon EC2's model is a solution for shelfware, says IDC

Sick of overpaying for features they don't need or use, enterprise customers are eager for software vendors to enable pay-per-use models that better align cost with consumption, according to IDC Corp.

Vendors keen to maintain the rich upfront license revenue they reap today may resist, but they risk losing customers to Software-as-a-Service alternatives such as Amazon.com Inc.'s EC2 with capacity-based charging models close to true pay-per-use, according to a report published this month by the research firm.

“Customers believe they have been forced to buy more software than they need or use,” wrote IDC analyst Amy Konary. This creates a “value disconnect” that isn't alleviated by heavy discounting.

Konary argues that vendors need to move to pay-per-use pricing models where they are accountable to customer satisfaction, and “where real value is in the ease, intuitiveness, and seamlessness of the experience.”

She compared it to the shift in the music industry from selling entire CDs to selling individual songs to customers, who are now empowered with software to manage their music collection the way they want. She also likened it to Amazon's Web storage service, EC2, which lets companies host their own software and pay for it based on the number of app-hours used.

That's not true usage-based pricing — users pay the same rate no matter whether the app is heavily or lightly used — but it is an “example of the spirit” of pay-per-use models that allow customers to “purchase at a more granular level than was previously possible,” wrote Konary.

IDC surveys show that the ability to “pay for only what you use” as the most common benefit cited by enterprise buyers (78%). Konary also cited one company that was able to cut its software spending by $30 million after using a tool from Flexera Software to track usage.

Vendors are justified in fearing that “if customers started paying only for what they use, they will pay a lot less than they do today,” she wrote, citing one vendor, Aspen Technology, that shifted to a subscription licensing model and saw its year-over-year revenues fall 78%.

On the other hand, CIOs and other enterprise buyers still want the security of knowing that costs won't suddenly spike from unpredictably heavy usage, Konary said. A compromise is “the cell phone model where tiers of usage are offered to increase the predictability of monthly costs,” Konary wrote.

Customers also worry about “big-brother-style reporting, with usage information automatically going back to the vendor,” she wrote. The solution for these privacy concerns, said Konary, is letting customers see — and potentially act on — the data first. She cited technology from Agilis Software as an example.

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