RE: Tiered pricing - a vendor's perspective -- MIDRANGE-L

A larger box costs more because it will support more users; you're
suggesting a bigger box is required because there's a response time addict
replacing the caffeine addict.  A big box will support a small user but not
vice versa; if the small guy wants a big box, he'll expect to pay more for
greater capacity/performance.  This is the buyer's, not the vendor's,
decision.  If a "smaller" company requires a larger machine, the assumption
is that the system provides significant functionality.  If that's true, then
it follows that the system provides a greater payback and therefore provides
a satisfactory return on the investment in the bigger box.

In my industry (transportation/logistics software), IT costs tend to be
higher per dollar than most other businesses.  There are many reasons for
this, but the bottom line is that my customers generate an enormous number
of transactions on a daily basis, and those transactions are required to
provide extremely high levels of customer service in a complex business
operations environment with (generally) very low profit margins (in this
market the iSeries-AS/400 is the platform of choice).  And within this
industry, the "truckload" guys have a relatively simple environment and they
can get by with a much smaller system than a "less-than-truckload" guy with
the same revenue.  The nature of the business has a lot to do with your
requirements and perspective.  And it's not correct to assume everything is
stacked in the vendor's favor: system upgrades have allowed my customers to
reengineer business processes which have resulted in faster generation of
invoices, fewer corrections, and better management reporting.  Yes, they've
have to pay for it, but the payback has been very good.  Yes, the software
fees to IBM can be hefty, but the iSeries is a software-centric system, and
I don't think IBM discloses how much work goes into writing microcode for
the various processors.  It may look the same to us but who knows if it
really is the same under the covers.

Is taking advantage of the fact that one company is bigger than another bad?
What about the average cost per user?  Again, application software pricing
requires a different approach.

While charging for support separately might be interesting, support (as a
bundled cost) can be compared to insurance.  Otherwise, charging by the hour
or incident would be a complex administrative process and probably a major
cause of customer dissatisfaction.  Support operations are funded by support
dollars, and fewer predictable support dollars would yield a smaller support
organization.  IBM isn't going to maintain the same support organization now
in place if support becomes pay-as-you-go.  IBM will make customers pay one
way or another!

When I had my 9404 and 9401's, I was glad I didn't have to pay the same
price for OS/400 as my customers.  Regardless of whether you like it or not,
tiered pricing is a fact of economic life.  Making an emotional argument
doesn't work against for forces of business, finance, economics, and Federal
income taxes (not that I wouldn't like a flat tax!).


-----Original Message-----
From: midrange-l-admin@midrange.com [mailto:midrange-l-admin@midrange.com]On
Behalf Of Brad Stone
Sent: Wednesday, October 31, 2001 2:10 PM
To: midrange-l@midrange.com
Subject: Re: Tiered pricing - a vendor's perspective

On Wed, 31 Oct 2001 13:12:15 -0500
 "Reeve Fritchman" <reeve@ltl400.com> wrote:
> 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.

Bad analogy.  I get more for less money with your example.
Or, I get less for more money.  Point of view.  A better
analogy would be charging a caffine addict .70 a can for
pepsi and charging the average joe who drinks 1 can a day
.50.  they both get the can of pepsi, but because one needs
more caffine, you charge him more.  It's highway robbery and
taking advantage of the fact he's a caffine addict.

With software, I get the same software, but because I have a
bigger machine than company x, even if company x is a bigger
company running a smaller machine, I pay MORE than company x
for the same software.  So the size of the company plays
virtually no part in tierred pricing (for software), only
the size of the machine does.  If bigger companies always
had bigger machines, then your argument would hold water.

If you want to talk support, maybe a 5mil shop has more
experienced personell and doesn't require help, because they
have experts inside.  A small show with a 170 and one
programmer may have to call several times a day.  It's all
relative, that's why support should be seperate from the
software purchase alone.

As you can see, it's all relative to your point of view, and
nothing is set in stone.  But tierred pricing assumes this
is not the case.  Combing the purchase of software and
support blurs this even more in the Vendor's favor.

Brad
www.bvstools.cm
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