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Optimal versioning strategy of enterprise software considering the customer cost-acceptance level

Zhu-Jun Wang (School of Management, Xi'an Jiaotong University, Xi'an, China) (State Key Laboratory for Manufacturing Systems Engineering, Xi'an, China) (The Key Laboratory of the Ministry of Education for Process Control and Efficiency Engineering, Xi'an, China)
Yang-Yang Sun (School of Management, Xi'an Jiaotong University, Xi'an, China) (Department of Advanced Design and System Engineering, City University of Hong Kong, Hong Kong, China)
Zhen‐Song Chen (School of Civil Engineering, Wuhan University, Wuhan, China)
Geng‐Zhong Feng (School of Management, Xi'an Jiaotong University, Xi'an, China)
Qin Su (School of Management, Xi'an Jiaotong University, Xi'an, China) (State Key Laboratory for Manufacturing Systems Engineering, Xi'an, China) (The Key Laboratory of the Ministry of Education for Process Control and Efficiency Engineering, Xi'an, China)

Kybernetes

ISSN: 0368-492X

Article publication date: 16 November 2021

Issue publication date: 3 March 2023

316

Abstract

Purpose

The 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/approach

A 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.

Findings

A 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/value

To 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.

Keywords

Acknowledgements

This work was partly supported by the National key research and development program of China (grant number 2019YFB1704100), the National Natural Science Foundation of China (grant numbers 72171182, 71801175) and the Major Program of National Fund of Philosophy and Social Science of China (grant number 20&ZD053).

Disclosure statement: The authors declare no conflict of interest. The opinions expressed here are those of the authors and do not necessarily reflect the position of the Government of China or of any other organization. We consent to publish this article in your journal and to transfer its copyright to the publisher once the manuscript has been accepted.

Citation

Wang, Z.-J., Sun, Y.-Y., Chen, Z., Feng, G. and Su, Q. (2023), "Optimal versioning strategy of enterprise software considering the customer cost-acceptance level", Kybernetes, Vol. 52 No. 3, pp. 997-1026. https://doi.org/10.1108/K-04-2021-0339

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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