Thursday, January 5, 2006

On Software Business Models, Part 2

Software can be sold as a good, service, or insuranceHow do we pay and how should we pay for software: as a good, service, or insurance? Traditionally, software has been sold as a good, often even packaged in a box and available in a store. This was not unlike traditional goods where each additional "copy" has to be produced or manufactured, and shipped, at a cost to the vendor. Of course with the Internet, all of this has changed: now software can be delivered at virtually no cost.

This means that the vendor can go for other business models, for instance making the software less expensive (or even free!) and driving revenue through services. This is in fact what some of the biggest software vendors like IBM and Oracle are doing, making more revenue from software-derived services, also called consulting, than licenses.

Are there cases where software vendors get most of their revenue through an insurance-type business model? In fact, this is more common than one might think: for software this is just called support. We see support as a major source of revenue for two types of companies: those with open source products and those with mature products having customers who have used the products for years and are more worried about some problem happening with the version they are currently using rather than upgrading to the next version. Companies like SAP, RedHat, or JBoss fit in this category.

Unlike most products, software can be sold as a good, service, or insurance. This certainly gives the entrepreneurs and strategists a lot of latitude when picking or adapting their business model, but it also makes it harder to choose the business model that will work the best for their customers.

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