Razor, Blades, and 10x: Key to Value-Based Pricing in the Data Warehousing Appliance Market

Price-performance is everything in data warehousing (DW), and it’s become the leading battleground for competitive differentiation.

As I noted in a blog post last month, the price of a fully configured DW appliance solution has dropped by an order of magnitude over the past 2-3 years, and it’s likely to continue declining. In 2010, many DW vendors will lower the price of their basic appliance products to less than $20,000 per usable terabyte (TB), which constitutes the new industry threshold pioneered by Oracle, Netezza, and other leading DW vendors.

But that’s just a metric of price, not price-performance. Ideally, each DW appliance vendor should be able to provide you with a metric that tells you exactly how much performance “bang” you’re getting for all those bucks. In a perfect world, all vendors would use the same price-performance metric and you would be able to compare their solutions side by side.

But, as I noted a year ago in another blog post, truly comparable cross-vendor DW benchmarks have never existed and are unlikely to emerge in today’s intensively competitive arena. No two DW vendors provide performance numbers that are based on the same configurations, workloads, and benchmark metrics. And considering how sensitive these performance claims are to so many variables in the vendors’ solutions and in customers’ production environments, it can be quite difficult to verify every vendor performance claim in your specific environment.

Of course, DW appliance vendors push back vehemently on dollars-per-TB comparisons, on the grounds that they ignore performance, functionality, and architectural differences. Nevertheless, this sort of common-denominator pricing has taken hold in the DW appliance market, due to encroaching commoditization, the growing glut of new vendors, and a lingering soft economy. Oracle and Netezza have dialed up the pricing pressure by each offering their new DW appliance families starting at $20K/TB. Other key DW appliance vendors, such as Microsoft, have made low pricing a key component of their go-to-market strategies.

It’s clear that most DW vendors will, over the coming 2-3 years, move inexorably into the sub-$20K/TB pricing range. Some will go there kicking and screaming, but we’re in an ongoing price war and those vendors who can’t compete on price won’t last long unless they can offer a significant value-add to justify premium charges. That’s why Forrester foresees DW appliance vendors moving, over the next 2-3 years, to a “razor and blades” pricing strategy. Under this strategy (modeled on the Gillette company’s famous approach), the basic DW appliance platform Is the “razor,” and is provided at a loss-leading commodity price as an inducement to acquiring premium, add-on capacity, solutions, and services (the metaphorical “blades”).

However, DW vendors who choose not to do the “razor and blades” strategy can still prevail if they adopt another value-based pricing approach that I like to call the “10x” strategy, which hinges on demonstrated performance. Many DW vendors will tout their superior performance to justify pricing over and above the sub-$20K/TB common denominator. DW appliance vendors have long asserted that their solutions offer tenfold (or greater) performance enhancements compared with the competition, with their own previous product versions, or even vis-à-vis what customers are doing now. When pressed for details, vendors often provide their own proprietary benchmarks showing more performance “bang” in the new product, in the form of faster queries, greater concurrency, and higher-volume loads.

Essentially, the 10x strategy could potentially form the backbone of many DW vendors’ value-based pricing approaches. However, the only way for the poor customer to know if these 10x claims hold water is for the vendor to demonstrate this enhanced performance on the customer’s own queries and data sets. If the vendor can demonstrate an order-of-magnitude improvement, they can justifiably charge customers a premium. If they can’t, the vendor should bear the financial risk for its hype, and give the solution to the customer for free (if they’ll have it). One DW vendor that’s pioneering this approach is ParAccel, whose "FasterOrFree" program (the name says it all) demonstrates that it is not averse to assuming the financial risk associated with its own 10x claims.

To the extent that vendors pursue a 10x strategy where pricing is contingent on demonstrated performance improvement, the customer reduces risk and gains a turnkey solution that has been optimized specifically for them. Clearly, this sort of pricing approach can only thrive in a market where DW vendors invest heavily in sales-engineering teams that conduct a steady stream of customer-site proofs of concept. But that already describes the core go-to-market approach that has propelled Netezza and other DW appliance pure plays to marketplace momentum. So it won’t demand a huge cultural shift either among vendors or their core customers.

It will just demand that DW appliance vendors commit to putting their money where their mouths are, performance-wise.

Comments

Metrics for Benchmarking and Consumer Protection

truly comparable cross-vendor DW benchmarks have never existed and are unlikely to emerge in today’s intensively competitive arena.

Shouldn't there be any regulation or benchmarking by some trade body to protect the rights of the customer. Isn't a 10X claim misleading- How can customers get more protection for misleading ads on small ticket items like a 4000$ car 's mileage but not on purchases of millions of dollars.