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Vendors supersize software pricing

Vendors supersize software pricing

Widespread naivete about vendor pricing techniques, plus a lack of negotiation skills results in Australian corporations paying bloated prices for enterprise software, Meta Group warned last week.

According to Meta Group senior analyst Brian Prentice, vendors have switched tactics from so-called "pricing uplift" (a premium paid above US list price by non-US customers) to plundering differences between currency exchange rates, known as "universal pricing".

Under universal pricing, vendors set the cost of their product based on US dollars, with local sales operations then translating these into local currency. While the translation cost may appear straight forward, Prentice argues such calculations omit localised adjustment - usually by ignorance rather than intent.

"Universal pricing has numerous structural flaws. Customers outside the US have limited predicability in licensing costs as pricing ebbs and flows with the exchange rate. [It carries] the assumption that the exchange rate mechanism alone ensures product affordability...in one market [automatically carries] to all others," Prentice said.

Simply put, this equates to Australian software buyers being slugged with pricing and total cost of ownership schedules calculated on steeper US market pricing, rather than those optimized for local conditions.

To illustrate the pricing parity argument, Prentice points to the Economist magazine's Big Mac Index, which calculates the differential buying power of world currencies based on the price of a single standard unit - the much publicised McDonald's Big Mac, available at locally adjusted prices in over 120 countries.

In the case of Australia, the 2004 Hamburger Index does not bode well for Australian software buyers, with the Aussie dollar showing a 22 percent discount in currency purchasing parity power relative to its US cousin for 2004.

Citrix Australia and New Zealand vice president Gary O'Brien, contends users are generally well skilled in extracting discounts from vendors, especially where volume is involved. O'Brien said as valid as such concepts may be for other products, his customers were still shopping for best solution fit rather than price.

Salesforce.com Asia Pacific managing director, Doug Farber, said enterprises that operated in a number of countries were looking to standardize and fix global IT costs rather than having them rise and fall with the vagaries of currency hedging and other variables.

"A lot of this currency stuff doesn't make sense [to buyers]. We are not an arbitrager firm, we make CRM. Our chunks [of business] are smaller and more flexible and our transactions are more frequent...picking the exchange rate is a mug's game," Farber said.

While defending Australian pricing, both O'Brien and Farber conceded their companies are actively considering parity pricing for the Chinese market, saying market conditions in the Far East differed greatly to those in Australia.

Australian Information Industry Association general manager for strategy, James McAdam declined to comment, saying such debate was "complex and technical".


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