I had a great briefing this week with Ross Mayfield, the founder, Chairman, and a few other things over at Socialtext. In the course of the briefing we discussed my recent report predicting falling feature prices in the Enterprise 2.0 market — ReadWriteWeb has an excellent summary of the research and a lively discussion.

Ross’ concern — which seems like a reasonable one to me — is that customers may look at my report and ask “so, where is my price reduction?” This logic makes sense if the product set is not changing; if Socialtext was offering a wiki feature last year, and is only offering a wiki feature next year the revenue they can expect from that product is going to come down. There is just too much competition, too much bundling, too much commoditization.

With Socialtext, however, this is not the case. The company recently announced the launch of Socialtext People, a social networking module in Socialtext 3.0. Now, instead of simply facing falling prices for the its wiki feature Socialtext has added social networking to the mix, which will increase the average deal size for its customers. In essence it is moving up to a higher price plateau. That plateau is still going to lose value over time, but if Socialtext, and any other Enterprise 2.0 vendor, can continue to innovate and combine features the revenue the company sees will continue to rise — even as the price per feature falls.

It is still possible to improve the quality of the features offered, and if that improvement is compelling price erosion can be held off, however this treadmill is much more difficult to stay on, and Socialtext’s strategy of adding other features (while improving existing features) is the right strategy — it actually happens to be the exact strategy I advocated back in April in the recommendations of my market sizing report.

In the long run falling prices are going to make this a very difficult market in which to survive, but a nimble company that can continue to innovate should do well for the short run. And, as Keynes famously said, in the long run we are all dead (or at least happily retired).

*Upcoming research note: I’m trying to convince my colleague Gil Yehuda to take the analysis used for my report and write the “Users: Here Is How To Take Advantage Of Your Vendors” report. It won’t help Ross, but at least he has a compelling case to make to his customers.

*Briefing note: To brief me on your product please fill out this form with Forrester’s Briefing Central group. They manage all the scheduling (thank god) and the service is free. Hands down it’s the best way to get a hold of me.

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