Gamers and their loved ones had a tough decision to make this past holiday season: Upgrade to the new version of Microsoft's Xbox, available only to those willing to stand in line for hours (or pay an extra $300 to buy one on eBay)? Or hang on until the price comes down? As it happens, the decision was kind of a wash. For one thing, the new Xboxes often freeze up and sometimes overheat. On the other hand, they boast jaw-dropping graphics coveted by gamers. Those watching from the sidelines had to wonder what they were missing.

You may have felt pretty much the same way the last time one of your software providers announced a major upgrade, something vendors do with exasperating regularity--at least every year or two, and as frequently as every six months. Microsoft is actually merciful in this regard, given that its new Vista operating system, expected later this year, comes nearly five years after Windows XP--though that's small consolation to the thousands of businesses that still run Windows 98. Meanwhile, Apple's new Leopard operating system is expected around the end of the year, in keeping with the company's roughly 18-month upgrade cycle for operating systems. And most major Linux providers, including Novell and Ubuntu, have at least one new release scheduled for this year. There's no escaping the attack of the upgrades.

Software vendors point out that they're just giving customers what they want: better stuff. "We're in a very rapidly moving environment in which technology improves on a daily basis," says Daniel Marcu, a computer science professor at the University of Southern California. Marcu also is a founder and the chief technology and operations officer of Language Weaver, a company based in Marina del Rey, Calif., that makes software for translating documents into different languages. Its newest version, released in October, not only translates more accurately and quickly, it also allows users to customize the software to address specific technical and cultural issues. "If you compare what it can do now with what it could do just six months ago, you'll see a noticeable improvement," says Marcu. You'd hope so, considering some customers will have to shell out as much as $125,000 to get server versions of the new software. Still, Marcu says the upgrade is selling well.

The price tag for licensing a new version of a software product isn't the only cost to consider. A midsize company upgrading its financial or customer relationship management software might have to slog through a year's worth of information technology headaches to get the job done. Among the hassles: the bugs that invariably appear; the loss of all the customization performed on the old version; and the incompatibilities between the new software and other types of software you might be running. "You have to ask the question, 'Am I really ready to spend a lot of people's time on this?" says Nick Bonfiglio, vice president of operations at software vendor CollabNet in Brisbane, Calif.

"I love the whiz-bang stuff, but every time a client wants to upgrade, I ask them, 'Why?" says one consultant. "They say, 'Because it's a new version.' And I say, 'Right. But why?"

In fact, reaching for your wallet every time a new version of a piece of software is released is just plain bad management. "I love all the latest whiz-bang stuff, but when clients say they want to upgrade, I ask, 'Why?" says Jeff Roback, CEO of Praxis Computing, an IT consulting firm also based in Marina del Rey. "They say, 'Because it's a new version.' And I say, 'Right. But why?" It's a question many clients can't answer. Managers often have only a vague idea of what new features they'll be getting from an upgrade, Roback says, or how those features will add value to the business--never mind what problems the update might cause.

Which brings us to Microsoft's much-anticipated Vista operating system. Vista promises enhanced security features, better integration with Internet applications, and easier-to-use file systems. Nonetheless, the consultancy Gartner Group has been advising many clients that they can save money and hassles by holding off for as long as two years before upgrading. And when a major new release of Mozilla's free Firefox browser became available in late November, more than two million people downloaded it within 24 hours. A week later, reports of crashes, sluggish performance, and misloading webpages were ricocheting around the Internet. As Inc. went to press in late December, no fix had been made available.

Unfortunately, making decisions about upgrades is not quite as easy as simply saying no. Dragging your feet can in some cases be a mistake--even if there are no readily apparent advantages to the new software. Mariam Zahedi, a professor of information systems at the University of Wisconsin at Milwaukee, says that sticking with older software can be a big turnoff to younger, technophilic employees. What's more, while new software features may not seem useful in the context of how you do business now, they could in fact be critical to taking new approaches in the future. "By the time your competitors figure out how to be innovative with the new software, you could be left behind," Zahedi says. Unless your dreams are way more vivid than mine, for example, you probably didn't wake up this morning wishing you had a Xen Virtualization Hypervisor. But Red Hat's upcoming operating system, Enterprise Linux 5, will have one, and it will allow some servers to support multiple operating systems and thus a broader range of software. That, in turn, might translate to being able to offer customers a wider range of services inexpensively over the Internet. And that's a pretty good upgrade incentive for businesses running Enterprise Linux 4.

Whether or not shelling out for an upgrade will pay off for your business, you can bet it will for the vendor's. Upgrades are an enormous source of revenue for the software industry, and most vendors aren't above engaging in some form of stick-waving with customers who won't jump for the carrot. The big stick in this regard is the threat to retire older versions--declare them officially obsolete and withdraw support. Anyone who uses software from Oracle, JD Edwards, Siebel, and PeopleSoft has heard this warning many times, and it's not a bad idea to heed it. That's because Oracle has acquired the other three vendors, and plans to replace all of their software with integrated versions that won't be compatible with older versions. If you're a key customer of a smaller software vendor, you might be able to pull a reverse arm twist and get the vendor to make an exception for you. Otherwise, resistance can be futile.

And while you can hire third parties to maintain your older software when the vendor won't, that can turn out to be far more costly than just biting the bullet and paying for the upgrade. Praxis' Roback notes, for example, that when a new version of Windows comes out, it'll be difficult to buy new computers that come with an older version. "I see it all the time--a company wastes thousands of dollars on consultants trying to get its old Windows software to work with the new Windows software, and then they have to go through it all over again the next time they buy new computers or software," he says.

In the end, the only reliable way to approach the question of whether to upgrade is on a case-by-case basis, paying careful attention to what your business really needs and what other companies like yours are doing. And there are a couple of ways to avoid the head-scratching altogether. You can sign up for the free upgrades that come with a software service plan. Or you can run software, also upgraded for free, that's provided in the form of a subscription service accessed over the Internet, such as Bear in mind that "free" can actually be pretty expensive: Expect to pay around 20% of the cost of a software license each year for a service plan, as well as a monthly fee for the online service. But once you ante up, much of the burden of making upgrade decisions is shifted from your shoulders to the vendor's, which tends to ensure that upgrades will be worth the trouble. "We have to get customers to renew their subscriptions, and the value of our upgrades becomes part of the sell," says Bonfiglio of CollabNet, which recently brought out a major new release of its collaboration software for programmers.

Come to think of it, free upgrades would be a good deal in any number of industries. I've got a Sony PlayStation and a Volkswagen Passat that are just begging to be replaced.

David H. Freedman, a Boston-based writer and Inc. contributing editor, is the author of several books about business and technology. (