Optimal Distribution Strategy for Enterprise Software: Retail, SaaS, or Dual Channel?

While the optimal distribution channel strategy of physical goods has been extensively studied, there is a lack of research for that of enterprise software as a digital good. This research analyzes the optimal distribution strategy of enterprise software by taking into account the distinct features of enterprise software for both the short-run problem, in which the software quality is fixed, and the long-run problem, in which the software quality becomes part of the strategic decisions. Our results indicate that in the presence of high unfit cost relative to the customization cost, the dual channel strategy exists and generates the highest profit for the firm and the highest social welfare. When the unfit cost is low relative to the customization cost, the SaaS channel strategy becomes the best strategy for both the firm in terms of profitability and society in terms of social welfare. This key finding is robust in that it holds for both the short-run problem and the long-run problem.