Optimal versioning strategy of enterprise software considering the customer cost-acceptance level

Abstract

PurposeThe emergence of the Software-as-a-service (SaaS) licensing model dramatically changes how enterprise software is released. Especially, it is favored by small and medium enterprises (SMEs) because of the cost-friendly feature. In contrast, many large enterprises (LEs) own relatively abundant budgets and prefer the on-premise software to fulfill demands through customization. Considering the differentiated cost-acceptance level among customers, this study aims to address the versioning problem of the enterprise software faced by software firms.Design/methodology/approachA two-point distribution model is formulated to calculate the maximal profits software firm earned from both LEs and SMEs under three strategies (On-premise, SaaS and Hybrid). Then through profit comparison, this paper obtains the optimal versioning strategy and corresponding feasible conditions. Finally, the optimal solutions are derived concerning social welfare.FindingsA significant finding is that moving to SaaS becomes necessary for the software firms in product releases since the on-premise strategy will not be optimal. Based on this, this paper discovers that when LEs own a cost-acceptance level close to that of SMEs, the hybrid strategy is the only optimal choice. When LEs become less sensitive to costs, the hybrid strategy is suggested if the customization cost falls below the threshold. Otherwise, the SaaS strategy becomes the optimal option. The conclusions explain why some software vendors transit to “cloud companies” thoroughly and provide practical insights for software firms’ future decisions.Originality/valueTo the best of the authors’ knowledge, this paper is the first information economics study to consider consumer cost sensitivity in discussing enterprise software versioning. The differentiated cost-acceptance level is introduced to describe the customer utilities, and the results uncover the necessity of moving to SaaS under diversified customer composition. This work provides significant theoretical value and practical insights.