PurposeWith the rapid development of cloud computing, most software firms face the significant choice of whether they should change the versioning strategy of enterprise software from releasing the on-premise version to the software-as-a-service (SaaS) version. Data being generated and hosted on SaaS vendors' servers brings multiple effects. It enables customers to enjoy the flexibility of accessing data and using the software remotely, named the “portability” effect. However, on the other hand, the cumulative data resources on the cloud also provide a clear target for external attacks, leading to the concern of information security. Considering these, the authors hope to offer insights for software firms by exploring the strategy selection problem.Design/methodology/approachTaking the portability effect and security risks of the SaaS licensing model into account, the authors develop a two-period model to figure out the market segmentation and identify the feasible conditions for employing three alternative strategies. Comparative statics analyses are conducted to explore the influencing mechanism of exogenous factors on strategy selection. The authors also discuss the strategy selection in the presence of the network effect and the security loss faced by users of on-premise software.FindingsOne significant finding is that the on-premise strategy can be excluded when the potential loss from security risks is small. Under this circumstance, the dual version strategy is optimal provided that the increase of customer valuation caused by portability effect is below a threshold. Otherwise, the SaaS strategy generates the highest profit. When the potential loss from security risks turns large, the on-premise strategy, the dual version strategy and the SaaS strategy are the optimal options in order as the portability effect on customer valuation gets stronger.Originality/valuePrevious literature has insufficiently addressed the versioning issue of enterprise software. In this paper, the distinctive features of the SaaS model are considered, and differentiated results compared with previous work are obtained. The research results provide guidelines for software firms in deciding their product releases in the future.
Proof of Lemma 1: The optimization problem of the incumbent's profit when he adopts the on-premise strategy is given in the section 4.1. By solving ∂π 1 ∂pu = 0 and ∂π 0 ∂p S = 0, we derive the optimal prices p u = λ − Cp−s 3 and p S = λ + Cp−s 3 . Substituting them into x 0 = λ+pu−p S +Cp−s 2λ, we derive the marginal consumer type as x 0 = 1 2 + Cp−s 6λ . Thus the optimal profit for the incumbent is πProof of Lemma 2 and Lemma 3 are quite similar.Proof of Proposition 1: In the proof of Lemma 2 and 3 we discover that the location of the indifferent customer x 0 is the same no matter the incumbent adopts the SaaS or dual version strategies, which means the market share of the incumbent remains unchanged. With regard to the product prices, we find that when the incumbent chooses the dual version strategy, the price of SaaS version is the same as that in the SaaS strategy, which is p s = (2+β)λ−(θ−α)v+s 3 . But the price of the upgrade software is p u = p s + (θ−α)v−Cp 2 , which is larger than p s because x 1 = 1 − (θ−α)v−Cp 2(1−β)λ < 1 holds. Thus as long as the dual version strategy exists, it generates higher profits than the SaaS strategy.We then set the objective function as obj = π 1dual −π 1on−premise = [(θ−α)v−Cp] 2 4(1−β)λ + [(2+β)λ+s−(θ−α)v] 2 9(1+β)λ − (3λ+s−Cp) 2 18
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.
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