Software Pricing: A Hidden Inefficiency

The Hidden Tax on Businesses

For decades, enterprise software pricing inefficiencies have persisted, quietly impacting businesses in ways that are often overlooked. As Forbes and other industry reports highlight, the pricing models employed by software providers are deliberately opaque and flexible—often designed to maximize revenue while leaving buyers in the dark. 

But is it solely vendor pricing strategies that drive these inefficiencies? Let’s dive deeper to uncover the nuances behind this persistent challenge.

At the heart of this issue is the near-zero marginal cost of reproducing software. Unlike physical goods, where production costs factor heavily into pricing, software development is a largely fixed-cost endeavor. Once the product is built, replicating it for new customers costs the provider almost nothing. This allows software vendors to move away from traditional cost-based pricing and embrace value-based pricing models instead.

 

Value-based pricing introduces two key dynamics:

1. Flexibility to Maximize Perceived Value: Different organizations use software in different ways, and value-based pricing allows vendors to tailor prices based on how much a customer perceives the software to be worth for their specific needs. While this seems like a win for buyers, it also enables vendors to exploit these perceptions to charge significantly higher prices in certain scenarios.
2. Revenue Optimization: Armed with information gathered by their enterprise sales teams—such as the buyer’s budget, intended usage, and competitive pressures—vendors dynamically adjust pricing to maximize revenue and capture market share. This approach is standard practice across the industry.

 

Software vendors often justify flexibility and opacity as necessary to account for:

• Complexity of Support and Implementation: Different customers require varying levels of support, integration, and onboarding.
• Custom Features or Functionality: Tailored solutions often demand bespoke pricing structures.

 

While some of these arguments hold merit, the lack of pricing transparency can still leave buyers vulnerable, particularly those without a clear understanding of industry benchmarks.

 

A Costly Consequence for Buyers

While these pricing strategies work brilliantly for software vendors, they come at a significant cost to buyers. The opacity and flexibility of pricing can mean that companies overpay for software by 20-30% on average.

In extreme cases, businesses purchasing the same software for identical use cases have been known to pay prices that differ by a factor of two or three. These discrepancies occur because the process behind determining software prices is far from standardized. 

Vendors typically rely on internal pricing calculators that factor in variables such as:

• Usage metrics (e.g., number of users or licenses)
• Competitive intelligence
• Historical deal data
• Market forecasts and expected revenue
• Recovery targets for the provider’s initial software development investment

 

While these calculators provide a starting point, they are often influenced by subjective assumptions and estimating what buyers are willing and able to pay. Discounts and sales tactics are then layered in to reach a final price point. Ultimately, the goal for software vendors is not just to close deals but to meet or exceed internal margin targets. 

 

Now, we do need to acknowledge that overpayment isn’t solely due to software vendor tactics. Internal inefficiencies within organizations play a significant role as well. These include: 

• Underutilized Licenses: Organizations often fail to track actual software usage, leading to payments for unused or underused licenses.
• Inefficient IT Asset Management: A lack of centralized tracking for software procurement and renewals creates redundancies and missed opportunities for consolidation.
• Failure to Decommission Unused Subscriptions: Legacy systems or expired contracts are frequently overlooked, resulting in ongoing costs for services no longer needed.

 

Acknowledging these factors underscores the need for buyers to look inward, not just at vendors, to optimize software spend.

 

Amplifying the Pricing Challenge: Misaligned Incentives

In addition to opaque and flexible pricing, misaligned incentives between software vendors and buyers further exacerbate inefficiencies and drive overpayment. This disconnect in motivations creates a significant power imbalance during negotiations.

 

Sales Teams Are Driven to Maximize Deal Value

• Incentive Structures: Software salespeople earn commissions based on revenue, creating strong motivation to increase deal sizes.
• Upselling and Bundling: Sales teams often push additional features, users, or premium tiers to inflate the contract value.
• Resource Advantage: Vendors equip their sales teams with extensive training, market data, and pricing flexibility to secure the highest possible price.

 

Buyers Often Lack Incentives to Push for Savings

• No Personal Stake in Cost Savings: Many IT leaders and department heads do not see direct benefits (e.g., bonuses, recognition) from negotiating lower costs.
• Budget Protection: Savings achieved in one year may reduce their budget allocation in the next, disincentivizing aggressive cost-cutting.
• Deprioritization of Negotiation: Without clear incentives, buyers focus on operational priorities over lengthy and complex contract negotiations.

 

The Resulting Imbalance

• Missed Opportunities: Misaligned incentives lead to buyers paying 10–30% more than necessary for enterprise software.
• Inefficient Spending: Over time, these unchecked costs can result in millions of dollars in wasted expenditure across the organization.
• Amplified Seller Advantage: With sales teams highly incentivized and equipped, buyers often find themselves at a strategic disadvantage during negotiations.

 

This imbalance highlights the urgent need for businesses to rethink their negotiation strategies and address the structural misalignment that prevents them from realizing significant cost savings.

 

From the Inside Out: Why IT Solutions Research Exists

At IT Solutions Research, we’re more than consultants; we’re ex-software sales professionals who’ve spent years negotiating thousands of contracts. From this vantage point, we’ve seen firsthand the inefficiencies and challenges inherent in the software pricing process.

While a small minority of companies consistently excel at preparing, researching, and negotiating to achieve optimal software pricing, the vast majority miss out on critical opportunities to save. Most organizations overpay by 20–30% on software due to basic missteps, such as entering negotiations without the right data, benchmarks, or a structured approach.

 

The Buyer’s Disadvantage

One of the most pervasive issues we’ve observed is buyer unpreparedness. Not all buyers are equally disadvantaged, however, we’ve seen mid-sized businesses often struggle with pricing transparency and negotiation strategies, while larger enterprises frequently employ procurement teams armed with training, incentives, spend analytics tools, and market intelligence.

Many buyers delay negotiations until renewal deadlines are looming, leaving little time for strategic planning or vendor research. Without the groundwork in place—such as accurate benchmarks or a negotiation roadmap—buyers lack the leverage needed to secure competitive deals.

 

A Path Forward: How We Can Help

At IT Solutions Research, we understand these complexities from the inside out. As former software sales professionals, we’ve negotiated thousands of contracts and seen firsthand where inefficiencies arise—both on the vendor and buyer sides.

 

Our approach is designed to tackle overpayment from every angle:

1. Benchmarking and Research: We provide data-driven insights into what you should—and could—be paying.
2. Strategic Negotiation Planning: Tailored plans empower you to enter negotiations with confidence and leverage.
3. Execution Support: From start to finish, we partner with you to ensure your organization secures optimal deals.

 

Let’s Level the Playing Field

Enterprise software inefficiencies are a costly challenge that businesses cannot afford to ignore. Research shows that companies overpay for software by an average of 20–30%, with some paying as much as three times more than others for identical solutions. Over time, this translates to millions of dollars in wasted expenditures, hindering organizational growth and efficiency.

If you’re looking for ways to eliminate excessive software costs and start optimizing your contract negotiations, get in touch to learn more about how we can help.

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