Secrets of how network vendors determine hardware, software prices
Ever wonder why a software license costs as much as it does? If you suspect vendors just charge as much as they can get, you wouldn’t be far from the truth.
Ever wonder why a software license costs as much as it does? If you suspect vendors charge as much as they can get, you wouldn’t be far from the truth.
“It’s primarily market-based,” says Sally Bament, vice president of marketing at BlueNote Networks, which sells IP telephony software.
It’s inexpensive to manufacture software, so it doesn’t make sense to base pricing on the vendor’s cost, Bament says. R&D costs are taken into account in the company’s overall business plan, so that doesn’t play much of a role in pricing, either, she says. If a software component is licensed from another vendor, the cost is taken into account in pricing but it is still a very small part of the equation.
“It’s tough from a software perspective to base pricing on margin, because the cost of goods and software is very low,” Bament says. “We will look to see what the market value of our capabilities are. Obviously, being priced competitively is one of our value propositions, though we are not the cheap and cheerful low-end software solution. Typically, we will look at what the market bears.”
Software prices can vary by country, a Microsoft spokesman notes.
“As it relates to Windows, prices vary by region and are determined based on a variety of market specific factors including, but not limited to exchange rate, local taxes, duties, local market conditions and retailer pricing decisions,” the spokesman writes in an e-mail. “The primary principle in pricing Windows Vista was that comparable versions of Windows Vista would be priced the same as Windows XP.”
Software prices are subject to negotiation, Bament says. Bluenote has guidelines for volume discounts “depending on the strategic nature of the customer,” she says. Discounts are more likely if there are opportunities to deploy a product at a customer’s subsidiaries, she says.
With hardware, a vendor’s cost of building products plays a much bigger role in pricing, says Bament, who has experience with hardware developers such as Nortel and Motorola.
“You’re pricing not just to market but taking into consideration the cost of the actual product,” she says. “You’ll find commodity hardware products, the margins are very small. With more customized and higher-end hardware, [the margins are] typically larger.”
For high-end computing systems such as IBM Blue Gene supercomputers, pricing is still “heavily market-driven,” says Herb Schultz, IBM’s deep-computing marketing manager.
“The cost of things indicates a floor,” he says. “The pricing is heavily market-driven. It’s not like we look at cost plus [some percentage]. You’re always looking at market forces, competition, customer-buying behavior, what their capability to pay is. That’s why IBM has other offerings, leasing and financing options. It’s why we have Blue Gene in the on-demand center.”
IBM charges about $1.3 million per rack for the Blue Gene/P, its most advanced supercomputer, which was unveiled in June. The previous generation, the Blue Gene/L, also cost $1.3 million at one point, but IBM sales of the computer doubled this year after the company dropped its price to $800,000.
“Over time, some parts get lower in cost and we start getting economies of scale,” Schultz says. “You want to maintain a price performance curve, which is always going down. In high-performance computing, the expectation is the price is always going down.”
Art of price cutting
Cutting prices is often a good strategy, says Dan Clark, who worked in brand marketing at Digital Equipment in the mid-to-late 1990s. A general manager thought Digital should raise the price of workstations to hit projected sales figures, Clark says. He argued that lower prices would increase sales volume enough to hit the dollar goal.
“I had pretty good evidence that there was elasticity in the pricing. The general manager thought pricing was inelastic,” Clark says. “We won our argument by saying ‘why don’t we just sell one workstation for $1 billion?’”
After a price cut of 30%, Digital’s workstation sales nearly tripled, moving the division from fifth to third in market share, according to Clark.
“You can create a pricing model that fits your own internal business objectives, but has nothing to do with the reality of the customer, and you’ve failed,” he says.
Clark is now vice president of marketing at Lockdown Networks, which sells network access control appliances.
More than 60% of customers find that network vendor pricing structures are confusing, Network World finds in a new poll. Lockdown has tried a relatively simple pricing model, charging a flat fee of $25,000 for its appliance, while some appliance vendors will charge for the appliance itself, as well as per-user software costs, Clark says.
Lockdown’s simple price structure is based on slightly more complex reasoning, however. The vendor figures customers usually pay between $25 and $100 to protect and maintain each desktop with antivirus software, Windows updates and patch management.
Lockdown’s appliance targets enterprises with 500 to 1,000 users, so at $25,000 the per-user cost is typically between $25 and $50.
“It seems to be pretty on the mark for what people think the value is,” Clark says. “We don’t often get into intense negotiation for cost per user.”
The other major pricing issue is maintenance and support. Clark says Lockdown typically charges 25% of product cost for support, more than the industry’s 15% to 18%. Lockdown says that it offers better-than-average value because it provides updates twice a day.
