Study of Emerging Revenue Models

in Software Industry

Table of Contents
Executive Summary.................................................................................................. 3
Chapter 1: Introduction ............................................................................................ 4
What is a Revenue Model? .................................................................................... 4
Business Model and Revenue Model .................................................................... 5
Software Industry Highlights ............................................................................... 8
Oxford Intelligence Software Report 2013 Highlights: .................................... 8
Highlights of Indian Software Industry: ........................................................... 8
Chapter 2: Literature Review ................................................................................ 10
Business Model and Revenue Model .................................................................. 10
Importance of Revenue Model and Pricing Structures ...................................... 11
Relevance of Pricing in Software Industry......................................................... 12
Evolution of Revenue Models and Software Pricing .......................................... 13
Chapter 3: Research Objective ............................................................................... 15
Objectives of the Research .................................................................................. 15
Significance of the Study .................................................................................... 15
Chapter 4: Research Methodology ......................................................................... 15
Research Design and Approach .......................................................................... 15
Chapter 5: Study of Revenue Models ..................................................................... 16
Software as a Service (SaaS) .............................................................................. 16
Fixed Subscription Pricing ................................................................................. 17
Usage Based Pricing ........................................................................................... 18
Risk Sharing Model in Software Outsourcing ................................................... 18
Freemium Pricing Model .................................................................................... 19
Commercial Off-the-Shelf Software Pricing....................................................... 20
Bundled Pricing ................................................................................................... 22
Revenue from Paid Mobile Apps......................................................................... 23
Advertising Revenues through Free Mobile Apps ............................................. 25
Hybrid Revenue Models ...................................................................................... 27
Chapter 6: Case Studies ......................................................................................... 29
Microsoft Office Suite .......................................................................................... 29
IBM SPSS ............................................................................................................ 30
Infosyss Finacle Banking Solution .................................................................... 31
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Chapter 7: Discussion and Conclusion .................................................................. 34

Discussion ............................................................................................................ 34
Important Deciding Factors in Software Pricing ............................................... 35
Conclusion ........................................................................................................... 35
References ............................................................................................................... 36
Bibliography ........................................................................................................ 36
Other References ................................................................................................. 39

Executive Summary
Revenue is what defines the ultimate performance or a product and even a firm.
Investors and stock market are interested in revenue growth and profits made.
Sheer uniqueness and latest technology innovation no longer guarantee stability
of a firm. This research attempts to study and define emerging revenue models
being used by software firms to deliver their software offerings to the market.
Important deciding factors considered by companies constitute the research
findings of the study.
The study begins with segregating revenue structure from the business model and
defining its importance independently. However it becomes almost impossible to
study a revenue model without considering the parent business model under
which it works. Various software firms, products and services and their revenue
streams were studied. Out of the many models, the study focussed on 9 most
popular models. Considering the burst of mobile ecosystem and dependence of
businesses on mobile system, two models defining mobile app revenue streams
were also included. While studying these models, various sources of information
like previous researches done, current pricing structures offered by firms, industry
reports and forecasts, current trends and need, success stories and case studies.
Individually, benefits and challenges of each model were examined. Factors
affecting market dynamics, customer value, and firms decisions were identified.
In order to study practical comparison within the same product, case studies were
developed on MS Office, IBM SPSS and Finacle banking solution by Infosys.
Various sources of secondary information and previous research studies helped
build the data flow for the study.
Finally, 14 critical factors have been identified which affect decisions of firms to
go with a specific revenue model for a particular software solution. Management
and company executives should give strong thought to all of these factors when
they decide to launch a product into market under a pricing structure.

Chapter 1: Introduction
Since 1990s, there has been rapid change in Information Technology sector around
the world. With changing needs of consumers and businesses, role of IT has
evolved from innovation breakthrough to a hygiene factor running a business, be
it of small, medium or large scale.
As it is popularly quoted by Milton Freidman, Business of Business is Business,
one of the prime objectives of any business is to generate revenue. How the
organisation plans to use it is totally different story, but as far as the business
sales is considered, organizations always need to define how they look at earning
their sales and revenues. A grand business strategy always defines what, how and
how much revenue is expected. All stakeholders have a keen eye on performance
of a company in the short and long term. It can be safely said that revenue
strategies and revenue models are one the most critical aspects of a business.

What is a Revenue Model?

Revenue model defines a firms approach to getting payment for the product or
service it offers to its customers. It describes how revenue streams are drawn from
the value delivered to the users. This payment is mostly, but not necessarily be in
monetary terms. A firm may employ more than one revenue model as a part of its
business strategy. It may also happen that revenue model be different for different
customers who are offered the same product or service. In this VUCA (Volatility
Uncertainty Complexity Ambiguity) world being flexible in terms of your offerings
and pricing is a must have attribute in business strategy of any software firm.
Main aim of any organisation in defining revenue models is to have better
customer relationship which ensures sustainable revenue streams and continued
business opportunities in future. While business proposals are presented to
investors, they are mostly interested in how revenue model and revenue streams
are defined for the business.

Business Model and Revenue Model

A business model defines who will be the customers, what value will be created,
how it will be created and how to deliver it to the customer. Business model
consists of one or many business forms.

A revenue model explains how the company is compensated for each of the
business it provides, i.e. return for the value delivered. The compensation
discussed here is usually, but not necessarily, a payment. A company has the
freedom to create a revenue model for each of the companys business
configurations (Popp, 2011). Revenue model may consist of one or more revenue
stream. Usually one revenue stream pays for each of the business arrangement
offered but not necessarily this might be the case. In the case of SaaS, the customer
normally pays one subscription fee for multiple business designs. Hence, we can
say that there are flexible ways to create and define revenue streams for the goods
and services provided. Different types of revenue models and revenue streams are
created by choosing different values which depend on the value to be delivered,
the time period, size or features and benefit or output of the value for the user.
With growth of business size, organizations felt need for IT solutions to aid and
run their business processes. As most firms do not have expertise in IT,
outsourcing was a clear option for them. From client-server computing since early
1990s to cloud based services, firms look for IT solutions to run their business
While the development cost of a software is considerably high, its variable price is
much lower compared to that. There is no definite way to define the value of a
software which can be used to decide on its pricing. Due to this reason software
vendors attempt to have various pricing structure for revenue realization.
Pricing strategy for a software can be cost-based, customer-based or competitionbased. All of these factors are critical to price of a software but then one of these
has to be chosen to be the guiding factor for determining the software price. There
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has also been a discussion on value-based strategies, where value generated for a
customer forms basis of revenue for a software solution.
Software pricing is a complex issue. Traditional model of cost plus margin and
mark-ups do not work with software. There are various revenue models employed
in software industry which might not be found in other sectors like software as a
service (SaaS), mainframe processing, off-the-shelf fixed pricing, full
release/Right-To-Use (RTU) buyout, Pay per transaction, risk sharing and many
more. Companies even have totally separate and unique pricing for some of their
products. Software products tend to have new features that are incorporated in
future releases. These releases are also timed and priced strategically to attract
existing customers towards upgrading their platforms to the latest version.
Pricing models also include license based pricing under a maintenance agreement
where the customers pays an annual fee and continues to receive patches and
updates for free. Another format of pricing is bundled pricing where a host of
software are given as bundles without raising the overall price. This is done
mainly to enhance the attractiveness of the software package and induce
dependency and habit of usage for these software. The best example of this is
internet explorer and windows media player being bundled with Microsoft
Windows.
Software firms usually go for hybrid revenue models, i.e. several revenue streams
are used to avoid dependency on one stream and reduce risk. The structure of
revenue, often comprising of one or more non-monetary returns, can be a source of
competitive advantage for a business. Talking about software ecosystems, there
are two facets of revenue models. One, it can be used to generate real revenues for
the business and second, it can be used to fund other non-connected businesses.
This capital might be used to build competitive advantage in the market.
There has been a continuous shift from traditional models of pricing and revenue
generation to contemporary ways of getting returns on delivering value. Shifting
from permanent licensing to usage based, time bound or other subscription based
model requires a fundamental reconsideration of delivery and pricing. For
plausible reasons, firms are reluctant to reinvent their business all at once and
are instead taking a fragmentary approach. This may satisfy both customers and
vendors in short term, but over time, it mandates vendors to explain to their
customers that transition to newer solutions such as cloud and hybrid models
delivers better value for the price. Further, obscuring the environment is a huge
shadow over the industry as a whole, as customers perception of value itself is
changing. In addition to comparing the cost of purchasing an enterprise
application to the cost of developing an in house solution, customers consider how
much value they can derive from the technology procurement.
Incremental pricing for usage time or per user basisone of the popular models
currentlymay lower the initial barrier to purchase. However, it also provides

customers greater negotiation power. Firms therefore need strategies to maintain

sync between new values relative to price.
New delivery and pricing models are also emerging along with several broad
industry trends beating pricing and the prospects of value. As a result, the
software industry is witnessing large shifts in essential aspects in its business
operations. For example, the consumerism of IT has raised the expectation that
technology should deliver high performance at lower costs. This will lead to drop
in perceived value of software as cost-conscious users habituated to low prices of
mobile apps may hesitate to pay higher prices for enterprise solutions.
The other important industry trends forcing software industry pricing are:
Mobile becoming a priority for software developers, but it pushes vendors to
have multiple interface for same product.
Developers must ensure security for mobile and cloud platforms, as large
number of users and open accessibility demands better security for data.
Globalisation and market consolidation are drawing significant investors
attention, royalty revenue, and inciting innovation for existing products.
Virtualisation enables several users to run a single software program from a
central server, thereby reducing sales of singular software licenses.

Ten technology macro trends driving growth, complexity and innovation

Software Industry Highlights

Accenture Technology Vision 2013 report talk about how technology has become
the core to almost every aspect of a business. Businesses are going digital and all
executives must understand, embrace and create value from new technologies that
touch their business. Software today, has the potential to transform the very
business model of a company or industry in future. Some of the highlights: talk
data and data analytics, take advantage of velocity of data, business is going social,
be active about system security, integrate with cloud based solutions.

Oxford Intelligence Software Report 2013 Highlights:

Software market is the fastest-growing sector, accounting for 24.6 per cent of
the market in 2012, a 5.6 percentage point increase from 19 per cent in 2009.
Overall global IT spending (excluding telecoms) believed to exceed $2 trillion
in 2013, up 5.7 per cent from 2012.
Value of the three primary market sectors of the global software industry in
2012 were: applications software, US$167.58 billion, application deployment
and development software (AD&D), US$82.8 billion, and systems
infrastructure software, US$92.34 billion. Of the three, AD&D demonstrated
the most growth in 2012/11 at 4.6 per cent.
European and North American firms were the principal investors in the period
2007-2011, accounting for more than 83 per cent of all global software FDI
projects.

Highlights of Indian Software Industry:

(Source: highlights of 1st session of InTech50 Conference 2014- Author: Pankaj
Kulkarni)
80 out of 117 CMM Level 5 firms are Indian.
Indian IT Industry contributes 8% of GDP and constitute 25% of Indian
exports.
100 Indian firms have more than $1 billion market cap.
IT revenues grew from $100 million revenue in 1992 to $100 billion in 2013.
More than 400 Fortune-500 companies outsource IT work to India.
150 Fortune-500 companies have R&D centres in India.
Along with IT, Gaming and Movies is also growing big time in India. Labs in
Bangalore created substantial portions of movies such as Skyfall and Life of
Pi.
Literacy rate in India has crossed 80%.
By 2020, 20 lakh IT professionals will reside in Bangalore.
40% of Asian start-ups are from India.
By next year, India will be the 2nd largest hub by number of start-ups.
82% of Indian start-ups focus on a global market.
8

Source: Gartner, Forecast Alert: IT spending, worldwide, 2012

Source: Thomson Reuters and companies corporate reports

Chapter 2: Literature Review

Business Model and Revenue Model
A business model is not an explanation of a complex social system with all its
actors, processes and associations. Instead it explains the logic of a business
system for generating value that lies behind the actual processes (Peterovic, Kittl,
& Teksten, 2001). We can say, a business model is the conceptual and architectural
application of a business strategy and the groundwork for the execution of
business processes. Business model can be sub-divided into seven sub-models,
namely Value Model, Production Model, Resource Model, Revenue Model, Capital
Model, Customer-Relations Model and the Market Model. These sub-models and
their interrelation describes how business model helps in creating the overall
value for the firm (Osterwalder & Pigneur, 2002).
The most basic way to define a business model is way a company does business to
sustain itself- i.e. generate revenue (Rappa, 2005). A revenue model can be defined
as a specific set of business processes used to identify customers, market your
product/service to those customers, and generate sales from those customers
(Schneider, 2004).
Modern business model approach has broader scope where multiple firms and
their interaction is considered. The relation between firms and the complementary
assets for the industry (Schweizer, 2005). How to generate revenue- i.e. to define
revenue model and revenue streams which leads to analysing business model in a
revenue generation framework. This calls for defining the customer, customer
segment and customer needs. While business model focusses on value definition
and creation, revenue model talks about value assumption.

Dimensions of Business Model

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Importance of Revenue Model and Pricing Structures

Over the last two decades, increasing complexity of the environment posed
challenges for companies to revisit their traditional model of pricing: i.e. cost plus
margin is the price for a software (Aeppel, 2007). This approach of pricing often
failed firms to realise complete value of their software solution. But some of the
firms have succeeded in overcoming these challenges and complexities by
employing sophisticated pricing structures (Carricano, 2014). And only few have
been able to overcome market dynamics to achieve pricing power to extract
premium for their software.
Profitability is largely impacted by pricing. Pricing strategies differ considerably
across Customers, industries and countries. Researchers generally agree that
pricing strategies can be classified into three groups: competition-based pricing,
cost-based pricing and customer value-based pricing (Hinterhuber, 2008).
Customer value-based pricing is increasingly being considered, if not being
adopted immediately. Profit potential for value-oriented successful pricing
approach is much better than for any other pricing method (Monroe, 2002).
The increased popularity of value-based strategies among practitioners and
academics is built on a general acknowledgement that the key to sustained profits
lies in the crucial features of customer value-based pricing like designing products
and solutions to meet customer needs, understanding the source for customer
value, defining prices as a function of value and implementing reliable and stable
pricing policies.

Source: (Customer value-based pricing strategies: why companies resist, 2008)

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Relevance of Pricing in Software Industry

One of the primary reason for IT outsourcing or purchase of a software is cost
saving in the long term (Sridharan, 2013). There is an associated cost of developing
a software for the vendor firm which has to be realised and profits must be derived.
And hence, pricing and revenue model for software is critical to both customer as
well as the vendor firm. A robust pricing model is one of the basic element of long
term business relationship and helps to align the interests of all the stakeholders
involved.
Right pricing of software not only increases revenue but also the payback three to
ten times of the investment (Davidson & Simonetto, 2005). Surveys have
suggested that in spite of huge positives available at lower risk, only a few firms
pursue systematic revenue model approach. Although many companies are trying
out price optimization models, AMR Research survey suggests that only three
percent of the companies are make an effort for proper pricing implementation
management. The essential processes involved in software pricing are: Devising a
pricing strategy, optimizing the price quote, execution of pricing policy and
considering customer profitability.

Different pricing approach vs customer goals (Source: Deloitte Consulting,

2005, (Davidson & Simonetto, 2005))

The economic crisis which extended from 2007 to early 2010 forced many
companies rethink about using price to keep up sales volume and retain market
share as buyers reduce their purchase levels and competition cuts down on prices
(Piercy, Cravens, & Lane, 2010). In fact, prices not only influence micro economic
factors of supply and demand but also affect buying behaviour and long term
customer relationship (Gourville & Soman, 2002). When customer checks for
prices of a software, high pricing levels may deter the buyer. Retail consumers
may even opt to go for a trial version or just download a pirated copy.
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Evolution of Revenue Models and Software Pricing

One of the most critical risk to software industry, which still continues to haunt it
till date is piracy. It can be done either in whole form, or by copying certain
elements and using it further in some other software (Mann, 2004). Commercially
available software are the most vulnerable to piracy and IP infringement.
Software as a Service (SaaS) can be a solution to this problem, but its feasibility
is still questionable as subscriptions to software services can also be compromised.
Pricing of software is also coupled with degree of openness- how open the software
is for use. Highest degree of openness is what the open-source software define.
There are multiple factors like word of mouth, network based externalities,
economies of scale and compatibility between software (Rahmandad & Sibdari,
2012). An important competitive threat is presence of an open-source software
option in the market. This leads to reduction of price of software in the market.
Software industry is itself a frequently changing and complex industry. Its
structure and dynamics keep evolving as new technological solutions come into
the market. Software vendors have generally three main sources of revenue: first
the software price itself, second maintenance and technical support price for the
software obtained from business customers, and third additional services like
installation, training and customization (Cusumano, 2007). Companies have
shifted focus from license/product fee to maintenance and support pricing
structure- helps in customer retention, provides better premiums, and also
provides accounting benefits.
Going by the economic theory, software pricing can be linear, i.e. fixed price for all
units, or non-linear- differential pricing of units where users gets to choose how
much to use and how to use depending on paying capacity (Youngsik, Yunkyung,
& Yoonsik, 2010). There is an another issue related to pricing decisions, Pay-first
& product-second vs. product-first & pay-second. In the former process, user pay
first and then use the software. Here economic benefits are weighed more, both for
customer as well as the vendor firm. In the second method, customer uses the
software first, and then pays the price. Cash inflows are delayed depending on the
payment cycle. Incorporating various payment systems, setting timing for
payments and opportunities for customers can reap in better profits and other
benefits in long term.
How customers pay for the software depends on how they see value in the software
solution. The timing and pricing structure also depends when customers realise
the benefits and payment timing suits their needs (Chung & Bontis, 2000). These
elements of customer purchasing behaviour are analysed by the vendor firms and
they align the pricing scheme to suit the buyers.
Considering e-marketplaces, 5 major strategies are identified w.r.t revenue
streams, 1) look beyond transaction fees for obtaining revenue, 2) develop
speculative revenue strategies, 3) develop alternative billing strategies, 4) obtain
13

revenue from other value added services and 5) remain focussed on key clients
(Lunn, 2002). These five sub-strategies very well define the broad pricing strategic
decisions that any software firm should go for.
While there are number of revenue strategies and pricing mix are there to be
considered for academics and industry, this research is limiting the scope to
following mentioned major revenue models that are most widely used or are
emerging as most popular ones to be discusses and incorporated in recent past:
Software as a Service (SaaS), Fixed Subscription Pricing, Usage Based Pricing,
Risk Sharing Model in Software Outsourcing, Freemium Pricing Model, Bundled
Pricing, Revenue from Paid Mobile Apps, Advertising revenues through Free
Mobile Apps, and Hybrid Revenue Model.

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Chapter 3: Research Objective

Objectives of the Research
1. To understand different revenue models employed across the world by
software firms.
2. Important factors considered by software firms in deciding revenue models.

Significance of the Study

Technology is one of the critical factors of production in traditional economic study.
In todays world, dependence on technology solutions by and software industry are
deciding factors for success of any business. Globally, software sector is evolving
at rapid pace and the changes that take place are crucial for software companies
as well as their customers. Software firms often get confused and land up using a
revenue model that is complex, redundant or does not fit with the value delivery
model of the firm. Synergy between revenue model and customer needs is highly
critical to success in todays competitive environment. What type of revenue
streams are to be decided depends on the factors affect the revenue model. This
research attempts to identify important factors that can be considered while
deciding on which revenue model to be used. This will help the firms smoothen out
their revenue streams and build stronger overall revenues.

Chapter 4: Research Methodology

Research Design and Approach
While gathering information and relevant data, secondary research methodology
was adopted. Numerous scholarly articles and empirical studies conducted by
researchers around the world were considered. Primary source to gather research
articles were Ebsco Database, Emerald Insight Database and Google Scholar
website.
The biggest source of latest trends in the industry, i.e. internet articles and
published news were also considered to form the basis of research and reach
conclusions. Apart from these, reports published by consulting firms on industry
trends and emerging models in recent times were also given due attention as a
source of relevant information.
For studying and comparing features of software products and find pricing
structure of the same, official websites of these products were considered as
primary source of data.

15

Chapter 5: Study of Revenue Models

Software as a Service (SaaS)
Software as a Service, popularly abbreviated as SaaS, is a contemporary revenue
model in the software sector. Instead of installing the software in individual
machines and running it, the software is hosted at a remote central location and
accessed through a web browser. Thus, the software vendor provides the software
applications, infrastructure and services through a network. Users dont have to
bother any more about system maintenance. Compared to traditional software, it
is easier to switch vendors (Dubey & Wagle , 2007).
Software as a Service provides better access to software services for its customers.
Small and medium businesses benefit the most as they dont need to maintain
infrastructure at their end (Turner, Budgen, & Brereton, 2003). Simply pay for
the service license or per transaction basis and use the service. Cloud based
services, which are the latest in consumer as well as enterprise markets, is the
best example of software as a service. Users need not know where or how the
software is being hosted. Just pay for the usage and access it from anywhere on
the network.
Offering Software under SaaS model is beneficial for the software firm in a
number of ways. It helps them to overcome many limitations and constraints
(Turner, Budgen, & Brereton, 2003). One, they can maintain the hardware which
suits their need and fits with the software requirements. Second, scaling up the
performance will be much easier rather than asking the client to do the same at
their end for better software delivery. Third, making changes in the software or
applying patches and updates is much easier. Fourth, in case the system hangs up
or a crash occurs, it is easier for the maintenance team to find the fault and restore
the service quickly. Fifth, even the R&D costs are lower as firms need not maintain
multiple versions and test changes for each version (Dubey & Wagle , 2007).
SaaS not only promises lower costs for companies, it also promises better service
levels. This makes it more attractive option to adopt than traditional off the shelf
software. This is evident from the fact that growth of SaaS market is 20 percent
per year compared to single digit growth in traditional software delivery model
(Ma, 2007).
Success of SaaS model is depended on large number of clients i.e. economies of
scale is important as the cost of hosting the software is high, and achieving
profitability means the service must be used in order to justify the costs (Dubey &
Wagle , 2007). Even switching to other vendor is highly dangerous to the business
as it means sudden unexpected cut of revenues. Due to this reason, software firms
often mandate penalising the customers for exiting before the contract expires in
order to discourage them from switching vendor (Turner, Budgen, & Brereton,
2003).
16

SaaS is the most preferred model when the software service is more commoditized
in nature. Requirements are generalised and common across industries, as in case
of sales force management service provided by salesforce.com.
Under SaaS model, firms offer their online services under two broad type of
revenue models, the first one is the fixed subscription pricing, i.e. obtaining a
subscription or license for a fixed period of time. The other model is pay per
transaction or usage based pricing.

Fixed Subscription Pricing

A subscription based pricing is one where users pay for short term subscription for
the service availed over the internet (Bala & Carr, 2010). Subscription based
software services may or may not be usage based priced. Business customers are
increasingly opting for this model as it gives them the freedom to switch to a new
user when the software service is not satisfactory (Dubey & Wagle , 2007).
According to Merrill Lynch, 25% to 45% of new software deals are made under
subscription based pricing model (Software Pricing, 2004).
Industry leaders in their respective service type like salesforce.com and WebEx
have proved the viability of this model. These large players having economies of
scale have been able to achieve similar profit margins like traditional software
license model. But those having lesser turnover have managed to achieve only half
of margin levels.
Fixed priced subscriptions are more viable for consumers who are sure of high
usage and are looking at doing away with hardware and maintenance cost of a
computing network, but still want to save on usage costs for unlimited usage. Such
users have a more homogeneous level of usage. Fixed fee subscriptions are also
preferred when the overall cost of the software is low compared to higher priced
usage based software services (Postmus, Wijngaard, & Wortmann, 2009). Fixed
fee subscriptions are also believed to provide stable revenues as compared to
dynamic pricing. (Fishburn, Odlyzko, & Siders, Fixed fee versus unit pricing for
information goods: competition, equilibria, and price wars, 1997). A research test
conducted by Fishburn and Odlyzko suggests that fixed price model do slightly
better than pay-per-use model. Also, both models lead to a price war among the
players in software market (Fishburn & Odlyzko, Competitive pricing of
information goods: Subscription pricing versus pay-per-use, 1999).

17

Usage Based Pricing

Usage based pricing, or better known as pay-per-use model, as the name suggests
is based on the usage by the user. Charge is for per transaction or access of the
service.
When users are not sure of their usage or the usage is heterogeneous in nature,
they prefer to go for usage based pricing model. Also, this model facilitates low
usage consumers to use the software service and decide upon whether it proves
beneficial and they are interested in it (Bala & Carr, 2010). This model also helps
to extract more consumer surplus as normally, charges on per transaction basis
are higher compared to a fixed fee subscription.
Usage based pricing is a platform for newer software service providers to enter
market and provide their service on trial basis. Also, smaller businesses get to try
these services and help support their business IT needs.
There is a downside to SaaS model. Software quality may go down. Also, it may
not fit the need of customer as they are not customizable enough in many cases
(Choudhary, 2007). Usage based pricing proves to be very effective in such cases.
Some services, like online payment facilities, are by nature transaction based. In
such cases, the revenue sharing is best on per usage based levels (PWC, 2007).
Usage based models are suited for firms facing issues with service provider
productivity and uncertainty in demand. It helps software vendors to share fixed
cost among many customers. This model helps to convert capital expenses into
operating expenses (Sridharan, 2013).
One important feature of usage based pricing is that, if the demand is large and
stable, risk of losing investment is low. So the prices are inflated but still they
seem to be low for per-unit consumption basis. This helps vendors to recover the
fixed as well as variable cost much easily.

Risk Sharing Model in Software Outsourcing

For the last two decades, firms have both, invested heavily into their IT systems
as well as struggled to adapt with the system and use it effectively for their
business. Many times poor software quality is to blame for various types of issues
faced by companies, both related to functionality and security (Kim, Chen, &
Mukhopadhyay, 2010). Earlier, software providers had no incentive to provide
substantial quality levels. And users were also less knowledgeable about possible
reasons for the problems they faced with the software.
Since early 2000, customers had already started asking software vendors to
include liability clauses in contracts. Annual maintenance contracts are one way
to ensure the software service vendor delivers what was promised. But as
18

dependence on IT and their importance in core business strategy increases, IT

related costs have become a major chunk of expenses and clients need more risk
sharing in IT contracts to ensure their investments are worth. Even more,
customers want their IT vendors to add value to their business and not just help
in saving costs (Jain & Khurana, 2013).
This has a many fold effects. Vendors become more serious towards their software
performance and customer satisfaction is more important to them than ever
before. This also increases competition in the market and hence a better
competitive edge for those who are ready to share the risk with their client. It
automatically increases trust in the vendor and deepens the relationship between
the business partners. Service providers like Infosys, Tata Consultancy Services
and others are increasingly focusing on adding value for their clients and ensure
they fully satisfied with the services provided to them.
Risk sharing models are executed in various types like profit sharing model,
incentive-linked model, shared risk-reward and others. Profit sharing model is
best suited when business customers are expecting drastic improvements in their
business performance, output, cost saving or end consumer satisfaction. Another
reason is that such models are used when the software employed is used for a
major business transformation where service providers have greater delivery
promised and, at the same time, have even more freedom to achieve the
transformation. Thus the end profit achieved is linked with the risk shared by the
service provider (Sridharan, 2013). Talking about incentive based pricing model,
service providers are paid bonus incentives for achieving certain pre-negotiated
performance. This is a strong method to motivate the service provider to deliver
better quality performance on continuous basis. A slightly modified version is the
shared risk-reward pricing model where, under agreement, client and software
provider share profits for a specific period of time.

Freemium Pricing Model

The word Freemium is made up of free and premium, and as the word goes, a
freemium software comes as free of cost for basic version/usage, and a fee is
required to use additional premium services. The best example is of Skype video
calling software, where PC to PC calls are free but a user needs to pay to call a
phone from his computer.
Freemium is the most simple and widely used model to penetrate market and
induce usage. Users are then targeted and motivated to pay for extra/premium
services. Freemium can primarily be of two types, feature-limited freemium (FLF)
and time-limited freemium (TLF) (Anderson, 2009). In FLF model, users need to
pay for extra features that they would seek to unlock, where as in TLF model the
usage of the software is on trial basis for a limited period of time. For example,

19

many game developers and anti-virus firms provide 30-day or 60-day trial for their
software.
The basis of this model can be derived from product demonstration and free sample
techniques used to market a product. This can be very well applied to digital goods,
where the experience or trial of the software is learnt only after the customer uses
it (Chellappa & Shivendu, 2005).
It is difficult to say how well the performance of this model has been in the past,
but it is surely a popular revenue model used around the world for SaaS as well
as software products (Niculescu & Wu, 2011).
An interesting marketing tactic employed by some software firms, called seeding,
is observed in freemium revenue model. Here, a small number of potential
customers are provided the full software for free. This is believed to induce usage
and help to influence other users in the target segment (Niculescu & Wu, 2011).
Another variation to freemium model is called the razor and blade model
providing basic software platform for zero price and charging for extra parts of the
software system (Cusumano, 2007).
Research has shown that switching from a traditional charge-for-everything
model, to freemium model can improve profitability. But there is also a flipside to
this. Software provided via freemium model may not help covering costs by
purchase of just a handful of users while thousands of other users choose not to
pay for it. This poses a serious threat to viability of the model. Some vendors
choose to offset the loss by offering an ad-supported model.

Commercial Off-the-Shelf Software Pricing

Under the commonly known as Commercial-off-the-shelf (COTS) model, software
are made available commercially for purchase through open marketplace, third
party reseller or other direct channels. The software license is for the complete
lifetime use of the software for a specific version. Upgrades to newer versions are
hardly provided by software vendor except for minor patches. This model is widely
used by companies like Microsoft, IBM, and Adobe for providing their full version
of software and platforms. In this revenue model, software development, testing
and launch costs are too high. The target is to achieve maximum sale. Also, these
software are those which are high in demand and required to complete certain
tasks like Microsofts Windows platforms, Microsoft Office suites, Adobe
Photoshop, IBM SPSS analysis tool. These applications are general in usage and
have high demand. Traditionally, software were made available mostly in COTS
format in CDs and DVDs. Over the time, they were also available for purchase and
download for those having high speed internet connections.
In COTS model, the software licenses are available for fix individual use. A
software, for example, with 10 user licenses purchased by a firm, can only be run
20

on any 10 machines in the firm. In floating license model, commonly used in

commercial software other than database applications, there is a limit on number
of concurrent PC accessing the software, the license for which is obtained from the
management system (Chung & Bontis, 2000). If the maximum number of user
limit is reached, no further access to the software is can be made for more number
of users. The price of such business-use floating licenses are high compared to
individual licenses. In this case, firms need to predict their requirement of peak
users and the number of licenses they should purchase.
There are few challenges with COTS based applications. One of the prominent
drawback is that, even though the functionality offered is vast, it may not be
usable for a lot of users. And those functionality which users are looking for might
be absent and will have to go for a newer version, or altogether a different vendor.
Also actual users of the software have to adapt with the navigation and usage in
order to complete certain tasks. This increases dependency on the product and
there is reluctance to migrate to a different vendor, even though the other vendor
offers much better suited application. When support is needed with issues or
additional functionality in the COTS application, the vendor demands additional
fee to cater to the users personalised need. Also the support provided is restricted
and change in software code is denied most of the time by a type-cast response to
wait for the next update for the application (Boehm & Abts, 1999). Thus we can
say, that in a way COTS model helps to increase switching costs too high for users
to switch to a new vendor. But software firms need to make sure, not providing
much demanded features may result in complete wipe out of their product.
Even though COTS model has serious drawbacks, it is a preferred way to purchase
software. Reason being, it offers generalised functionality with better
responsiveness and is better in terms of cost effectiveness and marketing efforts
for the vendor firms (Kesseler, 2008). Also, firms are looking to target mass
markets. Once a COTS application becomes popular enough, users are more open
to adapt to it as everyone else around is doing so. The other benefit is that
standardised functionality is more reliable and can be used for commercial usage
where reliable performance is critical like in hospitals, airports, architectural
design etc. This also makes it highly important that it delivers what is promised
in terms of consistency, safety and security (Ye & Kelly, 2004).
But the icing on the cake, the most beneficial characteristic is support and cross
functionality with hardware devices. Due to their standardised nature, it is easier
for hardware vendors to develop and market additional hardware. This is one big
benefit of COTS over customised software applications.

21

Bundled Pricing
Bundling can be defined as joining two or more products or services together to
build value and differentiation, thus improve the offering to customers. Pure
bundling is termed when customers can buy only a complete bundle, whereas
mixed bundling arises when consumers can select between buying the entire
bundle or one of the individual part of it. A lesser obvious type of bundling is
unbundling or pure components, i.e. customers can only purchase products
separately.
A typical example of a mixed software bundle directed to the web development and
graphic design market is the Adobe Creative Suite. The first version of Creative
Suite (called CS1) was released in September 2003. This bundle has advanced over
the last eight-plus years to pool a complimentary set of common products like
Acrobat, Photoshop, InDesign, Illustrator and Dreamweaver. The bundle provides
an economic gain for the customer, and a comprehensive and fully integrated set
of tools.
Product bundling is a common feature witnessed in software sector. Often, it is
pervasive to avoid bundling. Users fail to realise they have been using a bundled
software and assume the bundle for a single solution. One of the most critical
reason for this is to reduce dependency or usage of software provided by other
vendors. But the question arises, that do shoppers prefer product bundle? Do sales
improve when firms bundle their offerings? Would a bundled option cannibalize
sales of existing products leading to overall lower revenues?
Researches have concluded that customers might actually value the bundle less
than they would value singular component products- that there is a "negative
synergy" associated with product bundling. Despite this, they found that Nintendo
sold the most products with a bundle optiona video game console with a game
sold together as one bundlealong with an option to purchase each piece
individually (Gerdeman, 2012).
Sales from this "mixed bundling" offering were estimated to be much stronger than
a scenario where such a bundle was not offered. Total hardware sales were higher
by approximately 100,000 units when bundles were offered. Much more
surprising, the sales of software video games jumped by over a million units. The
company would see an increase in revenue from bundling due to better sales for
both hardware and software (Derdenger & Kumar, 2012).
However, when a bundle is the only option to buya "pure bundling" scenario
Nintendo would do much worse, compared with both options, pure and mixed
bundling. Revenues reduced by over 20 percent compared to the mixed bundling;
the total hardware units sold dropped by millions; and even software units floored
by over 10 million.
If consumers surely want a product and only have the choice of a bundle, firms
think they can reap in revenues due to the monopolistic nature of product
22

availability. But thats not the case. Consumers can postpone the purchase and
wait till they have a better deal to go for. It is important to note that consumers
must be provided with flexibility to choose for. In fact, better choices in terms of
individual products and bundles can prove to be even more beneficial for the firm.
IT increases immediate revenues and deepens trust in the firm.
For bundling to be effective, firms need to see what market forces are in action
and how to gain benefit from them. Bundling makes sense when cost of acquisition
of software is high because bundles allow selling of multiple products to the same
set of consumers, thereby increasing the Average Revenue per Customer (ARPU).
As the number of products being promoted are increased, more potential
consumers can be reached per dollar spent. This provides an economy of scale in
product distribution. If the marginal cost of bundling several products is low,
vendors can gain advantage in selling multiple products without a proportionate
rise in expense. Bundling can lower prices and help in offering market
differentiation. Bundling is more effective when consumer buying behaviour
outweighs classical economics.
A survey conducted amongst software companies show that 71% of them use
bundling as a pricing strategy for software delivery. Those who did not employ
bundling are small firms as their product portfolio is too small to implement
bundling. Typical bundle consists of five different sub parts, i.e. diversification is
considered to be essential amongst the respondent firms. This also backs the
notion that tailored bundling is the most appropriate form of bundling for software
industry, since it helps to achieve more flexibility for package composition
(Angeren, Bommel, Arupia, & Brinkkemper, 2012).

Revenue from Paid Mobile Apps

Mobile business is an extremely fast growing sector providing mobile devices,
contents and related services. Like numerous other new developing businesses,
mobile business holds the features of innovative technologies, critical large
number of users, and incredibly fast changing environment. The advent of app
stores, marketplaces and various application developers have already stirred each
fragment of the mobile chain, such as developers, operators, OS platform owners
and manufacturers (Xia, Rost, & Holmquist, 2010). Apple Inc.s popularly known
business model is one of the most successful ones in the global environment, most
industry players are trying to track and replicate Apples success by introducing
app stores of their own. Mobile business is not as plain and simple as it was
thought before. It is a vast complex network that is not just a buying and selling
association within the business. With the rise of numerous varieties of app stores,
questions arises to which app store is the best platform for the developers to
deliver their applications.

23

Analysing different phases in app purchase process, the total transactional cost
can be determined for the user when entering an app market. This analysis for
transactional costs shows whether any transaction in the market is actually useful
for the participants (Mller, Kijl, & Martens, 2011).

Market-research firm Gartner forecasted that mobile app stores will cater 17.7
billion downloads in 2011, up by 116% from a projected 8.2 billion in 2010, and
that app downloads will surge to 185 billion by 2014. Developers will witness more
than $15 billion of revenues in 2011 from online mobile apps, both from
advertising and download fees (Anthes, 2011).

Source: Distimo. Overview of App Stores, http://www.distimo.com/appstores/

It is believed that paid Android app downloads account for less than 2% on Google
play store, compared to approx. 13.5% for Apple's App Store (Jaffray, 2011).
Interestingly, mobile app download trends show that by end of 2013, it appeared
that the paid apps market was on the threshold of disappearing compared to the
market for free apps that generate revenue by advertising and then have in-app
purchases.

24

Benefits of purchasing an app: users get added features, no ads and popups to
disturb, it is assumed that paid apps are better way to avoid personal data theft
and cyber-attacks on users device (Segan, 2012). Thus we can say that developers
promise better performance, latest features and security for the money they
demand for a paid app. There are some unique apps made for specific usage and
for business purpose that are available on pay-basis. It seems relevant for those
who are interested and a large user base still believes in this and go for paid mobile
apps.
The mobile app ecosystem can be as volatile as one can think. The developments
occur at such rapid pace that projections made in beginning of a year for the
subsequent year seem to disrupt and fail at the end of the same year. It will be
interesting to note how mobile users develop and adapt themselves to mobile app
markets and how developers serve them to generate their share of revenue.

Advertising Revenues through Free Mobile Apps

The total global subscription base for mobile users is expected to surpass 5 billion
mark by the end of 2010, with little over 27% accounting for data subscribers
(excluding messages). This means that users are either actively downloading apps
or content, and/or engaged in browsing the web actively. The data penetration is
expected to reach 45% before 2013 with North America leading with almost 60%
of its user base accounted for active data subscriptions (Sharma, 2010). The dawn
of apps helped growth in data subscribers as the accessibility of flat free pricing
appealed users to go for upgrade and try out new applications.

Mobile ecosystem is growing like anything. Advertising model for mobile apps is a
model which is seen frequently in almost all the apps on a smartphone. In this
model, app developers remove the cost-barrier to buying an app and make it
available free of cost. The goal is to gather a large user base and collect information
on the public interacting with the app. This data gets organised and sold to
publishers and marketers who pay the app developer to place targeted ads inside
app.
25

Facebook is a best example of an app that does this well. Facebook users dont
directly pay anything to use it, but Facebook pulls a huge amount of their data to
sell precision-targeted ads. And this monetization strategy has proven to be very
effective for Facebook. The social giant reported a 151% increase in their mobile
advertising revenue during the second-quarter of 2014.
Mobile ad are just not the simple one kind of ad. There are a number of distinct
advertising methods such as: display Ads (Yahoo!), search Ads (Google), video Ads
(YouTube), text Ads (Google, Facebook), promoted Content (Twitter, Facebook),
audio Ads (Saavn, Gaana), recruitment Ads (LinkedIn), paid content promotion,
featured listings (Zomato, CommonFloor), location-based offers (Foursquare),
classifieds (JustDial, Quikr).
According to research firm Gartner, Mobile app downloads are projected to exceed
102 billion in 2013. Unpaid downloads stand at 91 percent of all app downloads.
Some developers provide in-app purchases to generate money from their apps, but
advertising act as important part in monetizing app sales. Development of Mobile
apps is highly expanding sector. Contemplating the factors of advertising revenue
can help developers as well as investors to design their expectations.
Amongst the top 50 free apps in the Apple App Store the highest grossers were
Clash of Clans (33,700 downloads per day, $168'000 revenue per day) and Pandora
(34'900 downloads per day, $120'000 revenue per day). Amongst the top 50 apps,
only 12 make revenue through in-app purchases. Mobile apps can act on their own
as a solid marketing channel for an online and even offline business. For example,
if firms are looking to promote a healthcare product or service, simply market it
on the top rated healthcare app and the product or service get noticed as easy as
a touch on the screen.
There are a number of benefits of mobile ad based revenue model. Many more can
be expected to come up as the mobile eco-system evolves. Some of these benefits
are: easy to facilitate download and penetrate market, quick to build audience and
word of mouth, better integration with app stores and other apps help to facilitate
routing through the ad, growth of mobile app market is exceeding all expectations,
users are themselves looking out for apps and sometimes even good deals that ads
suggest them.
Most mobile app-based ads function in similar way as traditional web
advertisements. Developers connect ad networks that facilitate sale of advertising
space in apps to marketers, who purchase spots that help reach targeted
demographics. Marketers typically pay the ad-network each time an app user
clicks on the ad. The network then gives a portion of the money to the developer
whose app exhibited the ad. Some apps may have a large-enough user base that
advertisers will like to work directly with the developer to place ads and this often
raises more revenue than network ads.

26

While the conventional way for mobile app ads to charge advertisers and pay to
app developers on per click basis, there are other revenue sharing arrangements
available that reward for views or specific actions. Effective cost-per-thousand
impressions, a measure that matches advertising revenue of mobile apps with
different click-through rates, varied between $.53 and $1.12 in 2012. An
impression happens every time a new ad is showed to an app user. So if an app
averages thousand daily users who see 2 ads each at an eCPM of approximately
$.50, the app would make $1 on average every day.

Hybrid Revenue Models

If a business model consists of several business forms, it is called a hybrid business
model. Hybrid business models can be a basis of business model synergies to gain
competitive lead (Popp, 2011).
When a revenue model comprises of several distinct revenue streams, it is termed
as hybrid revenue model. Going by the definition, a hybrid business model always
consists of a hybrid revenue model due to dependency and interconnection. Hybrid
revenue models can be a basis of revenue model synergies to gain competitive
advantage.
The hybrid revenue model for software as a product is usually made up of the
following revenue streams: Inventor (no benefit/revenue), IP Lessor (license fees),
and contractor (maintenance, service and support).
Hybrid model or multiple revenue streams can be in terms of a company, a product
or a service. For example consider case of SAP AG. SAP provides multiple product
and services like SAP ERP, SAP DB, consulting service, outsourcing services etc.
All these individually are a revenue stream for SAP. We can therefore say that
revenue model for SAP is hybrid in nature.

27

When talking about hybrid revenue structure for a product, the revenue for that
product consists of multiple streams. For example, MS Office is available on cloud,
as off-the-shelf and license based form. Again in each of these three, it has multiple
options based on features and usage restrictions. So, it can be said that MS Offices
total revenue is hybrid in nature.
IT service companies provide consultation, customised software solution,
implementation and installation, infrastructure, technical support, maintenance
and license to use the software solution. Each of these is a separate revenue stream
for the same solution offered to the same customer.
Software companies usually incorporate hybrid revenue models to define their
overall revenue. Even specific product and services have their own unique
contributing revenue streams depending on the characteristic of the value delivery
to the customer. The purpose or motive to have hybrid revenue structure can be
any one or more of the reasons like: increase consumer base, cater to different
customer segments, provide better pricing options, develop competitive advantage
focus on individual service and define revenues for the associated cost and increase
overall revenue by segregating into multiple revenue streams.

28

Chapter 6: Case Studies

Microsoft Office Suite
MS office is an office suite that provides applications for word processing,
spreadsheets, presentations, email-client, DBMS etc. It was launched by Microsoft
in 1988. Currently, MS Office is available across various platforms like Windows,
OS X, iOS, Mac OS, Android, and Windows Phone and as web application.
MS office package is made available through retail, volume licensing and software
as a service over the internet. It comes in various bundling options to suit different
needs of the customers like home, office, Enterprise, Government agencies,
Academic institutions, Non-profits- the way MS office website categorises its
software solution offerings on its website. Microsoft provides support till five years
after release of the version, or two years after the nest scheduled version release,
whichever is later. An extended support is provided which ends five years after
that.
The cloud version of MS office, i.e. subscription-based software services over the
internet is named as Office 365. Users can access their account and use the
applications depending on their choice of plan. Cloud storage for files is also made
available.
Office Online- free web-based services for basic office suite applications like
Word, Excel, OneNote and PowerPoint.
Office for Home: Home (Rs. 420/- per month), Personal (Rs. 330/- per month),
Home & Student, Home Business, Professional.
Office as off the shelf software: Available on retail channels and downloadable
through internet to be used using a license volume key (Ranges from Rs. 5,000/to Rs. 40,000/- approximately).
Office 365 for Enterprise: Business essentials, business, business premium,
Enterprise E1, Pro Plus, Enterprise E3 (Rs. 300/- to 1200/- Month) subscription
Office 365 Government: Specific bundle of software, especially for government
customers (Rs. 210/- to 1020/- per month). A trial version for 30 days trial is also
available.
Office Mobile: Includes the scaled-down of Word, PowerPoint and Excel as
mobile applications for Android and Windows Phone platforms. They are mostly
provided free of cost by OEMs. Other Office applications such as Outlook, OneNote
and Lync are accessible as standalone apps on app stores.
Discontinued Online Services: office live (online service for web hosting and
online collaboration) and office live meeting (web conferencing service).

29

(Information source for

www.products.office.com)

MS

Office

products

and

plans

pricing:

Considering other office application suites available in market by competitors such

as Apache Open Office, Polaris office, Kingsoft office suite and online-service based
Google docs, Microsoft also offers a wide range of options to choose from for
different sector of customers. It remains competitive by providing seamless interconnectivity between its applications, data import and export facility, and
dependence of other software to use word and excel of Microsoft as their input and
output files.
Case studies published by Microsoft on its website indicate that opting for cloud
based version of MS Office helped Rosebud Technologies to increase productivity
160 times, double its increase revenues by up to 60 percent and double its customer
base in five years. A similar benefit was observed by Perspicuity Ltd., who had a
major increase in customer base, better trust amongst its clients, recurring
revenues and greater profitability.

IBM SPSS
IBM SPSS is one of the most widely used product for statistical analysis solutions.
The first version was launched as Statistical Package for the Social Sciences
(SPSS) I 1968 by its early developers Dale H. Bent, Norman H. and C. Hadlai Hull.
Later the company was incorporated in 1975 as SPSS Inc. It was taken over in
2009 by IBM.
SPSS is used in social science studies, market research, consumer behaviour
study, academic studies, government and defence researches to name a few. SPSS
offers four product families:
The Statistics family Consisting of SPSS Statistics and its modules, the most
widely used suite of statistical software in the world
The Modelling Family Includes IBM SPSS Modeller Professional for data
mining and SPSS Modeller Premium for text analytics- leaders in analytics
software solutions
The Data Collection Family Consists of survey research suite and SPSS Data
Collection- helps to study customer attitudes and opinions
The Deployment Family Includes SPSS Collaboration & Deployment Services,
and SPSS Decision Management- the platform and the delivery products for
bridging the gap between analysis and action
IBM offers SPSS software packages in a number of variations- both in terms of
features, capabilities, delivery method and pricing. SPSS is available as off the
shelf software from retail stores, downloadable over internet using a license or
software service over the cloud. The software can be availed either as trial version,
a set of modules or a complete full-fledged package- standard, professional,
premium.
30

While its usability and feature richness is one reason for its high popularity, in
order to keep pace with changing consumer needs and increasing competition,
IBM offers SPSS in variety of bundles to cater to different customer segment
needs in the most effective manner. Huge cost, complexity of the features,
application areas and infrastructure affect users to think about which option is
best suited for their personal, academic or business needs.
Firms often use SPSS for multiple users by accessing it through remote
connection, i.e. installed on a local server and users access it through remote
desktop connection feature. This helps to reduce cost drastically: 1) Overall lower
cost of the software license for concurrent users, 2) lower IT-infrastructure cost, 3)
saving on power consumption, 4) Effective maintenance of software, server
machine, and 5) better storage and file handling.

Infosyss Finacle Banking Solution

Finacle is the Infosys banking solution product which was built from scratch in
1994. It contributes about 5 per cent to Infosys overall revenue. It is built on C++
and Java architecture. The latest version was launched in 2011 which was
v10.4.01. Finacle universal banking products are designed to provide the core
banking, e-banking, Islamic banking, mobile-banking, treasury, wealth
management and CRM requirements of corporate, retail and universal banks. It
is one of the major product in the arena of core banking in Indian and Asian
banking domains. The core banking solution is the main product and the most
expensive one in the Finacle product portfolio. A bank can opt for all of the
products from the Finacle family or choose to go for just one of them and opt for a
different product from another vendor. These individual products are modular in
nature and compatible with software solutions from other vendors.
Finacle is also offered as cloud based SaaS (Software as a Service) at considerable
lower cost than purchasing a license and setting up own infrastructure, called the
Finacle-Lite. In SaaS model, Finacle is hosted on Cloud and users from the bank
are provided with secured authentication which can be used to login to Finacle
secured gateway. The services available in cloud hosted Finacle are limited as
compared to physically installed product like limited number of login ids could be
generated. Finacle-Lite is aims to penetrate into smaller banks with low overall
turnover (Greer & Narter, 2012).
For a complete license and infrastructure setup for Finacle, customer incurs the
following charges: cost of subscription license, infrastructure cost, product
installation, customization and implementation, technical support and
maintenance charges. Any or all of the services can be availed from a vendor of
choice.
Price for the licensing revenues are supposed to be lesser beneficial for Infosys
compared to the after sale services, technical support subscription and
31

maintenance charges, which contribute a major portion to Finacle revenues. In a

published interview, Infosys CEO S. Gopalakrishnan mentions about how they
want to increase their revenues more from non-linear growth. He proposes two
ways of achieving this: one, by providing more cloud based solutions where
customer is charged on usage or access-time basis. Second, by charging the
maintenance and technical support in terms of number of tickets or incidents
resolved (Gopalakrishnan, 2011).
As is the observed general trend in software industry, Infosys also needs to keep
up with the market competition and customer needs. Potential customer base is
getting large as well as diverse. Large giants like ICICI need full-fledged banking
solution with most of the components to serve their own and their customer needs.
On the other hand, smaller banks need banking solution with basic functionality
at reasonable and affordable cost structure. End users of banks want to complete
transactions on their mobile itself. All this calls for a change in overall business
delivery for Infosys. Mobile banking, cloud based solutions, flexible pricing
structure are increasingly becoming the hygiene factor to do business in todays
global environment.

Infosys Finacle Customers by Geography (Source: Celent-Greer & Narter, 2012)

Finacle Clients by Number of Bank-User Accounts

(Source: Celent-Greer & Narter, 2012)
32

Finacle Pricing Information (Source: Celent-Greer & Narter, 2012)

Finacle Product Information (Source: Celent-Greer & Narter, 2012)

33

Chapter 7: Discussion and Conclusion

Discussion
This study has attempted to study various dynamics of software industry in terms
of the revenue, pricing and return on value delivered by software firms. A close
study of revenue model and its close-knit integration with business model was
studied. This is an essential to define overall business strategy.
The nine pricing structures identified and studied were: 1) Fixed Subscription
Pricing, 2) Usage based Pricing, 3) Risk Sharing Model in Software Outsourcing,
4) Freemium Pricing Model, 5) Commercial-off-the-shelf Software Pricing, 6)
Bundled Pricing, 7) Paid Mobile Apps, 8) Revenue from Advertising in Mobile Apps
and 9) Hybrid Revenue Model.
Each model has its specific importance in respective domains. Software service
delivery is increasingly noticing revenue sharing based on the output and benefit
to the customer. Software products are migrating to cloud based solutions for
increased reach and complement costs involved. Customers are increasingly
becoming price conscious and low or high pricing is less of a matter, compared to
the importance given to value being delivered. Users are increasingly discarding
paid mobile apps which is forcing developers to rely on advertising based revenue
streams. However, still some users do not mind paying an extra buck for their
specific needs.
Three prominent market leading products from respective domains were taken for
case study analysis, namely, MS Office, IBM SPSS and Infosys Finacle. Each of
these was studied w.r.t its pricing and revenue models being used by the parent
firm. This has helped to explain the reasons for using specific pricing structures
in a much better way.
Considering all the models, products, services, mobile ecosystems, cloud based
solutions and analysis of case studies, 14 key factors have been identified which
affect decisions of firms to use specific pricing structures. These factors are
discussed below.

34

Important Deciding Factors in Software Pricing

Type of software product or service category
Target customer segment
Strategic fit with firms core strategy
Competition and other options available in market
Acceptance level among customers
Differentiation of the software
Cost structure in development marketing the product
Software piracy issues
Customer buying & payment behaviour and preferences
Demand forecasts and stability in demand
Easy availability of active users on the platform in case of mobile eco-system
Advertisement network availability for ad space sellers and buyers for
mobile ads
Mobile Apps are increasingly becoming platform for information exchange
and micro shopping tools- In-app purchases are increasingly becoming the
trend while paid app market is becoming stagnant.
Catering to special customer segment needs (special business use software or
app- customer is ready to pay more to acquire required features)

Conclusion
Software companies need to understand, it is as important to invest time in
defining revenue streams as their product or servicing offering is. Pricing not only
provides return on investment and profits, it also determines return on the value
delivered. In fact, pricing structure is one of the key deciding factor customers
consider while purchasing a software. Until the last decade, software were
supposed to last longer once it is purchased. But cloud bases solutions and mobile
platforms have disruptive this belief. Mobile apps are discarded within minutes of
them being purchased. Large volume of purchase no longer dictates profit returns.
Study of 9 most prominently used revenue models in the industry were studied to
find the critical deciding factors. Besides forming the profit for the firm, these
factors define how a software would perform and general perception in the market.
Industry dynamics across the world are changing and software solutions are
shifting shape in every term related to features, hardware dependence,
accessibility, value creation and value delivery. The rapid pace at which mobile
computing is evolving and affecting businesses makes it redundant to forecast
what the industry will be in coming years. A lot of research opportunity is there to
study these models in close comparison to each other. Mobile based in-app
purchasing and mobile payments is catching up quickly with mobile pricing
structures discussed under this research. Computing business and software
industry players will be benefited with deeper study into these areas.
35

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