Research on the Optimal Sales Strategy and Pricing of Enterprise Software Based on the SaaS Model

基於SaaS模式的企業級軟件產品最優銷售策略及定價研究

Student thesis: Doctoral Thesis

View graph of relations

Author(s)

Detail(s)

Awarding Institution
Supervisors/Advisors
  • Gengzhong Feng (External person) (External Supervisor)
  • Chuangyin DANG (Supervisor)
Award date22 Jul 2022

Abstract

Enterprise software is a significant kind of information goods intended for assisting business management and improving operation efficiency. It can serve almost all aspects of business operations and thus generates a huge market value. In recent years, the development of cloud computing has made the software-as-a-service (SaaS) model rise, which dramatically changed the way information goods are delivered. By right of the cost-friendly, flexible usage scenarios and other features, the SaaS software effectively breaks the IT barrier of adopting enterprise software and achieves increasing popularity among businesses, boosting their digital transformation, especially those small and medium ones. Meanwhile, this innovative sales model offers a significant breakthrough point for partial software firms to enter this market, making the competition more fierce. Facing the increasingly complicated market situations caused by the SaaS model's rise, choosing the optimal sales strategy and pricing to optimize profit-earning becomes a critical challenge for software firms in the industry.

At present, most research focuses on the enterprise software’s optimal pricing and quality decisions. There is little work discussing the sales strategy selection problem, let alone considering the diversification of software firms and corporate customers caused by the SaaS model's rise. Hence, to fill this research gap and address this issue, we first start from the analysis under the basic market structure: one software firm serves the demands of the whole consumer group. By reforming the existing consumer-utility model to describe the features of SaaS software in use, we analyze and obtain the optimal sales strategy and pricing decisions of enterprise software. Then considering that the SaaS model's emergence motivates increasing software firms to enter the enterprise software industry, we adopt the Hotelling model to describe consumer choices under the market structure where two software firms serve the whole consumer group. Through the analysis, we derive the optimal sales strategy and pricing decisions for software firms when facing the diversification of software providers. Finally, considering that the popularity of SaaS software greatly promotes the digital transformation of small and medium enterprises, we carry out the last study under the market structure where one software firm sells products for two groups of customers, LEs and SMEs. By building the consumer-utility model that describes the differentiated cost-acceptance level among customers, we analyze and obtain the optimal sales strategy and pricing decisions for software firms facing the diversified consumer composition. The results obtained in this dissertation offer a theoretical foundation and practical guidelines for software firms in the industry to make sales strategies and pricing decisions under different market situations.

Specifically, the research content and innovation conclusions we obtained in this dissertation are explained from the following aspects:

1) By constructing the consumer-utility model to describe the portability and information security risks in using the SaaS software, we analyze and obtain the enterprise software’s optimal sales strategy and pricing for software firms in the industry under the basic market structure. When using SaaS software, customers build a real-time interaction with the cloud and upload the data they generated onto it, which helps enrich usage scenarios greatly and enhance the portability of SaaS products. However, information security issues also become prominent since a large amount of user data is stored on cloud servers. Existing research on the enterprise software’s sales strategy issue (Li et al., 2017) ignored the influence of these features. Thus we start with the study under the basic market structure: one software firm serves the whole consumer group. By integrating portability and information security factors in building the two-period model to characterize consumer purchasing choices, we investigate the optimal sales strategy and pricing problem, aiming to maximize software firms’ profits. The results propose that when software firms can create a relatively secure environment for using SaaS software, the on-premise strategy will not be optimal. Specific choices depend on the portability effect intensity and potential loss from security risks. Besides, we check the solutions in the presence of network effect and security loss faced by on-premise software users, and the results further prove the robustness of our model. By improving the research framework in Li et al. (2017), this study offers valuable managerial insights for software firms in making enterprise software sales and pricing decisions.

2) By constructing the Hotelling model to describe consumer purchasing choices under the SaaS software provider’s entrance, we analyze and obtain the enterprise software’s optimal sales strategy and pricing for software firms in the industry when facing the software providers’ diversification. As a significant innovation in information goods sales, the SaaS model offers a valuable opportunity for software firms to enter the enterprise software industry, forming a critical challenge for the incumbent who has adopted the on-premise model for a long time. Existing research once discussed the enterprise software’s pricing issue under the competition between the incumbent and the entrant offering SaaS products (Guo and Ma, 2018). However, there is a lack of exploration of the sales strategy selection problem in this situation. Hence, we carry out this study under the market structure where two firms, the incumbent and the SaaS software provider, sell products for the whole consumer group. By building the Hotelling model to describe consumer choices between two firms’ products, we analyze the optimal sales strategy and pricing problem, aiming to maximize the incumbent software firm’s profits. A significant conclusion is that selling both on-premise and SaaS versions will not be optimal for incumbents when facing competition from the SaaS software provider. They can judge the optimal strategy depending on the magnitude of upgrade cost and the value gap between the two versions. The examination considering the network effect proves the model's robustness. In contrast, solutions under the uncovered market setting indicate that offering both versions may be optimal under certain conditions. As the SaaS model’s rise leads to the diversification of software providers, this study first discusses this sales strategy selection problem in the competitive environment, and the results provide practical guidelines for the sales operations of software firms in the enterprise software industry.

3) By constructing the consumer-utility model to describe differentiated cost-acceptance levels among customers, we analyze and obtain the enterprise software’s optimal sales strategy and pricing for software firms in the industry when facing the diversified consumer composition. The standardized functionality design under the SaaS model effectively lowers costs in getting familiar with and using products and breaks the IT barrier of adopting enterprise software products. Thus the digital transformation of small and medium enterprises (SMEs) is greatly promoted, making the consumer composition more diversified. While large enterprises (LEs) that own higher cost-acceptance levels emphasize the demand satisfaction brought by software products. Existing research has discussed the enterprise software’s optimal pricing problem considering the consumer cost-acceptance level (Zhang, 2020), but its influence on software firms' sales strategy deserves further exploration. Hence, we carry out this study under the market structure where one software firm serves both LEs and SMEs. By building the model that describes the differentiated cost-acceptance level between them, we investigate enterprise software's optimal sales strategy and pricing, aiming to maximize software firms’ profits. The conclusions indicate that only selling on-premise products cannot be optimal for software firms considering the differentiated cost-acceptance level among customers. Specific sales strategy choices depend on the difference in cost-acceptance level among customers and the magnitude of customization cost. Examination of social welfare indicates the contradiction between software firms’ profit-earning and maximal social welfare, uncovering meaningful insights for regulators. As SMEs keep rising in the whole consumer group, this study first associates the cost-acceptance level with the corporate scale. The results offer significant managerial insights for software firms to make future sales strategy and pricing decisions when facing the diversified consumer composition.

In summary, the new-emerging SaaS sales model has become increasingly acknowledged among businesses. Since they have insisted on the on-premise model for a long time, software firms offering enterprise software products face the critical challenge of adopting the optimal sales strategy and pricing. However, the previous research rarely focused on this issue, and the limited relevant work was just finished under the basic market structure. Hence, to address this problem, we reform the existing research frameworks and introduce several new methods to build the models to describe consumer purchasing behaviors under three different kinds of market structures, respectively. Based on the market segmentation and optimal profit analysis under alternative strategies, we then derive and present the present optimal sales strategy and pricing results. By systematically investigating this problem from the research perspectives of market structures, this dissertation offers a solid theoretical foundation and practical implications for the future operations of software firms in the enterprise software industry.

    Research areas

  • Sales Strategy, SaaS, Information Goods, Pricing Study, Security Risks