Abstract:

Traditional software is permanently licensed and customizable， while SaaS services are standardized， and are generally charged at a monthly/annual fixed price subscription or according to the actual usage of each consumer. Existing research on the competition between traditional software providers and SaaS providers is mostly limited to vertical differentiation models， or given the pricing scheme of SaaS. Taking into account the vertical and horizontal differences between providers， as well as the consumer heterogeneity in the two dimensions of product usage and product preferences， the optimal pricing strategy of the SaaS provider and its impact on social welfare are examined. The competition between the traditional software provider and the SaaS provider is characterized by the Hotelling model， and the choice between subscription-based pricing scheme and pay-per-use pricing scheme is analyzed. The results are as follows. （1） When the vertical difference between the SaaS provider and the traditional software provider is relatively small and the horizontal difference is relatively large， the subscription-based pricing scheme should be adopted to extract more surplus from the locked market segment； otherwise， the pay-per-use pricing scheme should be adopted to ease competition and attract low-end consumers with low usage and large price sensitivity. （2） The higher the product customization level of the traditional provider， the more willingness of the SaaS provider to adopt the pay-per-use pricing scheme. （3） The best social welfare can be always achieved when the subscription-based pricing scheme is adopted by the SaaS provider. Therefore， if wishing the strategic choice of providers to be consistent with the goal of social welfare maximization， providers should be guided by the government agencies to diversify their products， and prevent homogeneous competition or price discrimination.

Key words: software-as-a-service, pricing strategy, subscription, pay-per-use