The pricing strategy analysis for the "software-as-a-service" business model

The Software-as-a-Service (SaaS) model is a novel way of delivering software applications. In this paper, we present an analytical model to study the competition between the SaaS and the traditional COTS (Commercial off-the-shelf) software. The main research goal is to analyze the pricing strategy of the SaaS in a competitive setting. The model captures the most salient differences between the SaaS and COTS, including their distinct pricing structures, user initial setup costs, system customization levels, and delivery channels. We find that the two could coexist in a competitive market in the long run, and more importantly, we show how the SaaS could gradually take over the whole market even when its quality is inferior. Surprisingly, our analysis shows that the SaaS should raise (reduce) its prices when its software quality declines (increases) over time (in the relative sense). © 2008 Springer-Verlag Berlin Heidelberg.