Let s face it: The traditional software business model is broken - A recent study by Goldman Sachs shows that in 2005 software companies will spend 82% up from 66% in 2000- of their new license revenues on sales and marketing. In other words, software firms are charging customers for their sales efforts under the guise of license fees! Since most customers dislike the dreaded sales cycle, I suspect many of them will take their money and put it elsewhere - most likely into software companies who charge less for their sales efforts.
How can software companies afford to plough most of their license revenues into sales and marketing? The answer is maintenance fees. For most software makers, maintenance fees are highly lucrative, often producing profit margins of between 80 percent and 90 percent. And the more customers a company has, the larger the maintenance revenue it generates and the more profitable it is. It is no surprise that a new generation of companies is adopting a different business model altogether: Drop the license fees and help customers sell themselves. At the forefront of this business model are open source software OSS- companies such as MySQL and SugarCRM. But the trend is crossing over to traditional software companies such as Oracle and even hardware companies such as Sun - Sun has recently announced that it dropping license fees for its software and will only charge maintenance fees. Many open source companies have adopted innovative techniques to help lower their sales and marketing S M- expenses. Larry Augustin, Chairman of VA software, asserts that open source companies S M expenses are 75% lower than traditional companies. Let s take a closer look at some of those techniques:
- Give the base product away. Many open source companies report 1000s of daily downloads with no sales interaction. About 1 to 2% of those trial customers come back to purchase maintenance and services - since few enterprises are willing to use an unsupported product. Whether this nirvana of build it and they will come is sustainable remains to be seen, particularly as competition heats up between various open source offerings. Still, there is power in free software: Jonathan Schwartz, President of Sun Microsystems says: Volume wins in the marketplace for technology and the price that drives the most volume is free. Focus on the end user experience. As mentioned earlier, most open source sales cycles start with the end user downloading the software and trialing it. If the end user likes the product, he is likely to champion it internally and ask for funding for support and services. This is different from the traditional enterprise sales process where purchase decisions were made largely by senior level executives based on strategic/political considerations with limited - or no input - from end users. Ride the culture of personalization. Most open source products are built by a community of developers, testers, end users, bloggers etc. Community participants take pride in their contributions and are therefore likely to become evangelists for the product. Word of mouth marketing in the form of blogs, wikis etc... is a much more effective and inexpensive form of marketing than traditional advertising campaigns. In addition, direct communications between technical developers and technical- customers in open forums is likely to carry more weight than the old tired marketing messages. Create an ecosystem. Successful open source products are part of a standard stack - e.g. LAMP Linux, Apache, MySQL, PHP/Python/Perl-. Since those products are integrated, customers, looking to adopt one product, are likely to adopt the entire stack. In addition, channels are more likely to ship/or resell the stack. For instance Dell has recently started shipping the LAMP stack with some of its servers. The halo effect. Until recently, many IT departments have been unwilling to buy products from new suppliers. However, as enterprises are successfully running open source products such as Linux, there is a halo effect around open source products that carries over from existing implementation to new ones. ol> Source and full article: