Tiered pricing - a vendor's perspective

["Reeve Fritchman" <reeve@xxxxxxxxxx>]

As the vendor of an industry-specific enterprise-level application package,
we face "size vs. price" issues daily.

Because we provide source code, we have no way to control any
system-enforced licensing provisions.  We price based roughly on transaction
count (which usually translates into a CPW), take other system-resident
applications into account, do not automatically charge an upgrade fee if the
CPU changes due to the addition of another major application, and do not
require yearly software maintenance contracts.

One size doesn't fit all, and neither does one price for _application_
software.  Industry associations charge membership fees based on
organization size; there are thousands of instances of tiered pricing
throughout the American economy.  A "quantity discount" is a form of tiered
pricing, right?  Same product for less money.  The per-can cost is lower in
a Pepsi 24-pack than in a six-pack.

It's not realistic for me to charge a $25,000,000 company the same price for
my million-line package as I change a $500,000,000 company.  If a company
considers a software purchase as an investment (which it should!), the
return on that investment (amount and timing) are major factors in the
decision.  The amount of the investment may be an exclusionary factor, i.e.
"building a new factory will make us more profitable but we don't want to
spend the cash on the factory because we're investing in new products."  But
the core decision is simple: will my business get a good return on the money
I'm investing?

Although I haven't done a detailed analysis of the subject, it may be
possible that tiered pricing is a quantity discount.  Does the cost of the
marginal TPC-C transaction decrease with larger systems?  It might, if only
because certain common system functions may become a smaller part of the
total workload as the application workload increases.

The biggest problem with tiered pricing is abusive and greedy vendors, and a
small iSeries off to the side is the perfect response.  Vote with your
wallet!