The nature of the software industry

In the software development industry, pricing option governs the choice of chan-nel, foreign distributors and choice of partner. The most common software pricing option is the product licence fee paid with a recurring annual charge for mainte-nance and customer support. Some firms rent out the legal rights of using soft-ware services for a specific period of time on a contractual basis. In the contracts the number of users and the time frame of use are specified. PC antivirus-related software is subscribed to through leasing the software application as a combina-tion of product and service over the internet. Through the leasing opcombina-tion the ven-dor firm may be able to predict the revenues for the upcoming year while sub-scribers renew the service. In the indirect pricing option, software development firms usually sell the product via value added resellers or distributors.

Sales cycle refers to the process of converting customers into users of the soft-ware. It is the time duration that customers (end-users) take to evaluate, view and purchase the software product including the free trial demonstrations and meet-ings with the seller. Thus, the sales cycle is the time period from the evaluation or initial offering until the sales deal is completed. Naturally, software vendor firms like to shorten the sales cycle, as a lengthy one means additional costs. Moreover, firms prefer a committed and experienced sales force that is able to convince a large number of customers to purchase the product in a relatively short time.

However, certain factors influence this length of time, which mainly relate to the product itself, rather than the market. When the software product is new and im-mature on the market, educating the users is the main objective of the vendor firm. An immature, complicated and complex product is likely to lengthen the sales cycle. In the case of initial sales of a new software product, the software is

sold via a personalized and committed sales force to initial users. Thus, direct involvement by the sales force is necessary. On the other hand, for the products which receive earlier market acceptance, indirect sales channels are used. The main objective of using sales channels for mature products is based on creating a lead generation of users in the sales pipeline. Due to continued revenues, the lead generation of users in the sales pipeline acts as a motivating factor for strengthen-ing the partnership between the vendor and the sales partner (distributor) firm.

The sales partner’s main interest is to implement the given product and provide after sales services. Thus, the choice of sales strategy and the pricing option would depend largely on the age of the product. Similarly, the choice of the sales and distribution channels is interplay of the pricing option and the length of the sales cycle.

Figure 16 denotes that under a vendor’s own control, direct sales channels are suitable for a low price and short sales cycle. A high price and short sales cycle may mean a vendor firm selling the highly priced product in a shorter time period.

However, this may not be possible, as high priced software will need a longer sales cycle to convince the end-users of the value of the product.

Figure 16. Choice of sales channel in software industry.

(adapted from McHugh 1999)

For a medium priced and medium sales cycle software product, the vendor’s owns personnel visiting the end-users individually can also be an option.

How-Vendor’s own direct control Low

High

Medium PRICE

Sales subsidiary/ systems integrators

Vendor’s own sales force/ direct control

Short Medium Long _CYCLE ^SALES

ever, for a medium and high priced product with a longer sales cycle, a sales sub-sidiary or partnerships with value-added resellers (sales distributors) may be needed by the vendor firms. In that case, these sales channel options are used for installation, the deployment of the product to the users’ facilities and providing after sales services. Software firms usually adopt a combination of several types of sales models as their sales strategy.

Figure 17 shows the sales function and the choice of sales strategy. The choice of a suitable sales strategy is primarily dependent on what type of sales functions are involved in a specific market. As with other consumer products, the marketing function aims to enhance the position of the company and the product in the minds of the users, thus helping to increase the market share of the company. Di-rect contacts such as personal relations, publicity via the press, advertisements in the media and contacts with analysts and consultants are important in creating word-of-mouth and earning credibility. The servicing function is important after the product has been initially installed. The user may need services related to con-sulting, training, maintenance, upgrades and new modules. Thus, according to the industry growth situation, the nature of the market and the product itself, software firms utilize any combination of the sales strategy that focuses on all the main sales functions of marketing, selling, implementing and servicing.

Figure 17. Sales functions and the choice of sales strategy.

Direct control Partnerships Channel option Marketing

Sales

Implementation Servicing

Sales strategy Sales functions Software vendor firm

Distributor/reseller/integrators

Technology partners

Due to the strategic importance of the marketing and the servicing functions in a software sales strategy, firms tend to maintain them under the direct control of the software development firm. Here, the role of the partners or the third party is as-sumed to be minimal. This is also shown graphically in Figure 17.

When marketing is the focus of the sales strategy, the value of each individual deal is more important than the number of deals. Therefore, firms focus on a lim-ited number of high value customers. In a partnerships sales strategy, the number of deals is perhaps smaller or greater; the key objective is to create a market share of the product by developing credible partnerships and business relations. While the channel sales option is mostly utilized when there is a larger customer base, the focus of firms is on the installation and taking care of the after sales services of the installed programmes. The channel sales option is most commonly utilized in sales strategies of foreign countries. However, firms may not follow the hard and fast rules of following such strategies, and a sales model of a typical software development firm can be a combination of any of these functions. This is typical when business grows and the firm has to divide its activities between the direct ownership and the partners. Further, the firm may have multiple sales strategies within each distinct market to suit available opportunities. However, the coordina-tion and control of each type of sales strategy may add to its complexity.