TRENDS IN FEE-BASED SUPPORT.

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As industries mature, prices collapse. That's one of the textbook laws of economics that's been causing so much grief in the software industry these days. But there's another economic law that offers better news: In mature markets, customers almost invariably spend more freely for support services.

In fact, fee-based services--which typically include premium support plans, maintenance, training, and consulting--have quietly emerged as a major source of revenue for a growing number of developers and publishers. Especially in high- end enterprise and professional markets, customers routinely expect to buy support services throughout the entire life-cycle of product ownership. For enterprise companies, these services often contribute 30%-40% of the vendor's total revenues, and may even be more profitable than the product side of the business.

In the world of desktop applications, publishers have been slower to develop fee-based service offerings (other than modest attempts at post-warranty telephone support). However, the Internet has drastically changed the economics of service delivery. The cost of delivering knowledge-based services to customers is approaching zero, and a few pioneers are experimenting with outsourcing and subscription models that transform a product (for example, tax software) into a Web-based service. For some applications, the product itself may become little more than a Cracker Jack prize that helps sell a much more lucrative portfolio of services.

Before we reach that point, however, it's clear that the majority of software companies will have to become more sophisticated about managing and marketing their fee-based services. Not surprisingly, developers and publishers have always paid close attention to their product operations--but even the best- managed companies tend to have only sketchy data about service profitability and performance. They rarely benchmark their operations and service offerings against other companies; they set service prices in a vacuum and design programs with almost no input from customers. If software companies had better information and more rigorous internal metrics, we suspect the profitability of fee-based services would rise dramatically for the whole industry.

To help close this information gap, Softletter and the Association of Support Professionals (ASP) recently recently conducted a joint survey of trends in fee- based services. We collected data from a substantial base of respondents, 222 companies (see page 8), that offer some form of fee-based services. We've drawn on this data to describe current service pricing levels and pricing models, program features, and marketplace trends. And here's what we found: