Will Virtualization End Hardware-Based Pricing Metrics?

Will Virtualization End Hardware-Based Pricing Metrics?

Published: October 11, 2000 | Updated: June 6, 2022

The virtualization trend is growing and changing the software industry. Research pundits, like Gartner, predict virtualization will quickly affect how customers and vendors think about software pricing and licensing. And since software giant Microsoft has clarified its server licensing for a virtual environment, you know the trend will have wide-spread industry implications.

We see virtualization as another compelling reason to develop and implement a pricing strategy that distances your software as much as possible from the hardware that enables it.

It Leaves Money on the Table

If you use a hardware-based pricing metric, you expose your business to:

  • Falling hardware prices force lower software price levels– The massive hardware performance gains at lower costs predicted by Moore’s Law is a reality. Hardware-based pricing metrics may make your products appear overpriced compared to new, lower-priced hardware. Customers are also likely to demand higher discounts.
  • Increased hardware performance leads to decreased software license sales – Today’s hardware cheaper and has higher performance – a trend that is likely to continue. With higher performance, hardware-based metrics, such as per-server, per-CPU or per-core pricing, allow customers to get more value from software without buying new licenses. 
  • Virtualization increases complexity – Virtualization, like multi-core technology that preceded it, undermines the two “virtues” of hardware-based pricing that lead to its popularity: simplicity and transparency. Many multi-core pricing schedules are far from simple and virtualization will likely add to that complexity. 

Value-Driven Pricing Metrics Can Boost Revenue

If you use hardware-based pricing metrics like per-server, per-core, or per-CPU, now is the time to change. We suggest using a metric that ties as closely as possible to the business value customers get from your software.

The specifics of a value-driven pricing metric depends on the application and software vendor but here are several value-aligned choices to consider:

  • User-based pricing – If customers get more value from your software when more people use it, consider using a metric tied to how many people use the software. 
  • Transaction- or asset-based pricing – Software that processes transactions or manage assets like real estate or financial portfolios, consider a metric tied to the number of transactions, properties or the value of assets under management. 
  • Pricing tied to web metrics – If your software is part of web-delivered functionality, metrics like users and transactions can be a problem so you will need to find a surrogate for value such as the number of page views, sessions, or even hits.

Transitioning Can Be Done Smoothly

Any change in pricing — especially a change in the pricing metric — can appear more daunting than it actually is. The more a company understands their software’s economic impact on their customers, the easier it is to choose a metric that scales with value delivered.

Once this is done, it is relatively straightforward to set new prices and possibly repackage the offering. The revised offering can be smoothly introduced once the financial impact of the changes on existing customers is understood.

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About The Author

Chris Mele

Chris Mele

Chris is Managing Partner for Software Pricing Partners, where he and his team have launched some of the software industry’s most transformative monetization strategies. As a former software company founder and leader, Chris focuses on the impact effective licensing, packaging and pricing strategies can make on the most essential software company metrics: revenue, profit and valuation. Under his leadership, Software Pricing Partners has become an influential voice for growth-oriented software companies both large and small.

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