• March 22, 2018
  • I’ve recently looked at the changes in markets and companies as industries grow and as a disruptive innovation commoditizes. Generally, prices come down because the innovation becomes commonplace and competitors fight for every scrap causing margin erosion. Eventually markets equilibrate and a monopoly or small oligopoly sets in. Typically, as Geoffrey Moore pointed out, mature markets have three competitors, the leader that gets most of the business, a fast-following challenger, and one or more niche players.

    We can see this playing out right now in various industries. Mature industries like databases have an oligopoly set up with Oracle and IBM leading. SAP with Sybase xxx is one of several niche players along with MySQL and SQLServer. Recently new approaches to data storage have come to market such as no SQL databases that offer a different approach. Amazon has developed an in-house product that has been a discussion topic for people thinking of dethroning Oracle but that’s not likely. More likely is that Oracle and IBM will be the database leaders until the planet no longer needs databases. It could happen.

    On the way to oligopoly we see vendors making mistakes that could cost them their leadership positions. Mature market leaders have figured out how to put customers in the forefront and their solutions look more like a broad array of services than products. That’s because they have come to understand the role of whole product and are willing to do whatever makes sense to keep customers happily engaged.

    There’s one practice, though, that flies in the face of whole product and keeping the customer satisfied. It’s the software audit. Essentially a vendor builds into its contracts the right to periodically inspect a customer’s systems to understand use patterns and to ensure that the terms of its licenses are adhered to. Typically, a contract for so many seats, or applications, or gigabytes can remain under a preset limit but should not go over. If there is an overage the customer would owe a higher license fee.

    All of this seems fair in the abstract but in practice customers resent the intrusion of an audit especially when the audit does not turn up a flagrant violation but instead identifies a possibility of one. Vendors have been known to bill on the possibility and that can cause, shall we say, disharmony in the customer base.

    In the future, the software audit will likely be seen as an artifact of the licensed software era. Subscription vendors and their customers don’t have the same issues because it’s clearer when the customer needs more seats and they make a purchase.

    But the software audit is here today and in my mind, it represents a mistaken approach to revenue generation by mature market vendors. It also opens a legitimate seam for the competition to exploit. Recalling that markets trend toward commoditization and that features and functions tend to converge on a market ideal, the cost of attrition, even in a licensed software situation, declines over time. So, the risk of customer attrition over some aspect of the whole product, i.e. policies and procedures, increases.

    You can see this scenario playing out in the document management space as Nitro, a document management company with a focus on whole product does battle with the leaders. Nitro is not a small upstart. They’re well over 10 years old and have a customer base of roughly 650,000. Nitro differentiates itself on a UI that’s very Windows-like and on price. But it doesn’t simply offer a lower cost approach to document management. Its flexible licensing policy avoids the software audit process. This seems to matter to its customers who want to deploy technology to all members of the company freely, without obsessively checking license allocation or fretting about fines each time a new hire comes on board. For them the audit can be a show stopper.

    My two bits

    Regardless of the size of the market or its installed base, a company needs to grow, preferably faster than its organic rate—when customers grow their business they buy more licenses. But in mature markets growth is a zero-sum game. For one company to grow it has to take customers away from competitors; usually, that means taking from the market leader(s) who have a majority of the customers.

    So the software audit, as useful as it might be for generating incremental revenue, has a downside. It is not the face of whole product that a company in a mature market ought to present because it can easily prompt a rush for the exits. That’s why so many vendors avoid such contention and focus on product line extension and new product development. Those activities are harder to pull off than swooping in with auditors but they are ultimately better ways to hold onto customers and grow markets.

    Finally, you might say that cloud computing with its per-seat pricing can avoid all of this but that’s not the point. A vendor that can adopt audits can also find ways to throttle use and charge dearly for increasing use. The real point is developing modern approaches to customers that generate revenue on actual products and services delivered rather than gotcha gimmicks.

    Published: 6 years ago