Optimal pricing strategies for internet-based software dissemination

In the recent past, there have been several initiatives by major software companies, such as Microsoft, to lead the industry towards electronic software distribution. In this paper, we use a monopoly pricing model to examine the optimal pricing strategies for ‘selling’ and ‘pay-per-use’ licensing of packaged software over the Internet. Traditionally, software distribution included outright sale as well as short/long term renting. With the Internet fast becoming a prevalent mode for disseminating sol^are, a customer can download and use sol^are on a need-by-need basis. For the sol^are vendor, offering the pay-per-use option to the consumer provides for a steady source of revenue and obviates the need for physical distribution, purchasing and inventory management mishaps. We examine the following issues in this paper: (i) what are the extra benefits to the sof^are vendor for providing the pay-per-use option?; and (ii) does the market size change? The contribution of this paper is to show that pay-per-use is a viable alternative for a large number of customers, and that judicious pricing for pay-per-use is profitable for the software vendor.