Editorial from the August 2007 issue of Managing Automation

Software Pricing: Have They Got a Deal for You

by Jeff Moad, MA Editorial Staff

Posted on Monday, July 30, 2007 4:43:11 PM                                     

Last year, Salvatore Emma began searching for a new enterprise resource planning (ERP) system for medical device manufacturer Arrhythmia Research Technology Inc. after top executives decided that ART's aging software could no longer support its growth-through-acquisition strategy. After narrowing down an original list of five potential vendors to three whose software had the functionality that ART needed, Emma's team began to talk price.

"We told them we wanted to avoid the typical used-car sales approach, where they start with an artificially high price, then we go back and forth before agreeing on the real price," says Emma, ART's director of IT.

Instead, two of the three vendors started with high prices, which they later negotiated down. One of those, Emma says, proposed a price of $840,000 for software and implementation services before eventually agreeing to $260,000, a discount of nearly 70%.

Rather than jumping at that apparently attractive deal, however, ART went with a different vendor, one that had bypassed the artificially high initial quote and started with a price much closer to the final number. The $20 million manufacturer selected IFS, even though its final fully implemented price was higher than the heavily discounted competition.

"What we were looking for from the beginning was a highly professional sales process," Emma says. "With the vendors that started high, we got the feeling that they were trying to take advantage of us and to make an obscene profit. That made us feel as if we couldn't trust that vendor."

ART's experience illustrates two important points about the enterprise application buying environment: First, although analysts, vendors, and customers say the deep discounting trend of two years ago has abated somewhat, even mid-size manufacturers, such as ART, can still expect vendors to offer significant discounts off list prices under the right circumstances.

And second, having gone through multiple enterprise software procurement cycles over the past few years, enterprise software buyers like Emma are becoming much more savvy about the process. Many, for example, now understand that software license price is only one element in their eventual total software lifecycle cost. As a result, more buyers today are focusing more of their efforts on understanding long-term costs related to enterprise software maintenance and upgrades, experts say.

"Even in the mid-market it's increasingly rare to sell to someone who has never bought an ERP system before," says James Utzschneider, general manager of marketing for Microsoft's Dynamics enterprise applications. "They've been around the path once or twice, and they know about the true back-end costs. They're much less likely to say, 'Wow, look at this great deal we're getting on the license cost.' "

But that's not to say that significant discounts on list enterprise software licenses aren't still available. The steepest discounts are available to large enterprises that may be considering a software platform switch and to businesses of all sizes able to live with a relatively vanilla ERP implementation that is not significantly tailored for a specific industry, says Ray Wang, a senior enterprise applications analyst at Forrester Research.

"At the high end of the market, we're seeing discounts routinely in the 40%-to-60% range, with some in the 60%-to-80% range, Wang says.

This relatively steep discounting remains on the table at the high end of the market despite rampant vendor consolidation in recent years, Wang says. Although the number of vendors pursuing very large accounts has shrunk, the intense competition between SAP AG and Oracle Corp., most notably, and the relative scarcity of new or replacement ERP purchases among large companies have served to preserve steep discounts.

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