Easier software pricing to combat hosted applications

Spending on applications is set to grow seven percent this year, and software vendors are sweetening their terms

Software suppliers are offering more flexible pricing to protect their market against the new wave of software-as-a-service vendors.

According to a new report by Forrester Research, financing options are “the newest front in the vendor war for a greater share of the IT budget”.

By offering flexible pricing schemes, vendors of traditional on-premises software can attract customers trying to keep down capital expenditure, said Forrester analyst Ray Wang.

The ability to move costs from capital expenditure to operating expenditure is frequently cited a major advantage of the online software model as it gets rid of the need for investment in servers and upfront software licence costs, by providing hosted hardware and a subscription payment model.

Meanwhile, Forrester predicts that the growth of spending of software will fall to seven percent this year, down from 10 percent in 2005. The reasons for this slowing include increasing standardisation and use of service-oriented architectures, as well as macro-economic factors such as high interest rates.

To compete for business, vendors such as Oracle, Sage, Microsoft, Sage and Business Objects have enhanced financing or leasing options or both. For example, some are offering more flexible terms to fit with the buying cycles or seasonality of customers’ businesses. Others lures include zero-percent repayments, lease-to-own schemes, bundled services, training and extra software.

“The initial competition to bring a customer on board is extremely intense so it’s very important to be able to knock out somebody else,” said Wang.

Wang said Oracle and Microsoft have perhaps the most powerful positions.

“If Oracle can provide financing and an enterprise agreement that locks out rivals. Oracle and Microsoft have the magic because they can offer the stack.”

However, Wang warned that buyers should consider the risk of lock-in to a supplier, and factor in the total cost of solutions including hardware before committing themselves.