In Enterprise Software, It's Still 'Pay Me Now or Pay Me Later'

Dennis Byron

Back in June there was a flurry of blogopatter about high maintenance fees from enterprise software suppliers. The discussions were tied into SAP announcing that it was folding the TomorrowNow tent and effectively increasing its maintenance pricing by dropping some lower-cost maintenance options from the price book. I posted on it here and then went on vacation.

 

I'm back to find that the issue hasn't gone away. SAP customers are pushing back even though some won't be affected until 2012 or so. Dennis Howlett picked up the topic on August 19 on ZDnet -- perhaps not for the first time; as I said, I have been vacationing -- as did Josh Greenbaum on July 21.

 

But before everyone in the IT department starts spending the money they are going to save as annual subscription maintenance fees plummet, I'd like to suggest a reset on the overall topic of how enterprise software gets priced. Here is an illustration of at least five ways IT suppliers meet their revenue/profit targets when it comes to software:

revenue flow models

As the illustration shows, the upfront fee for a right to use (RTU) license with subsequent annual fee is just one means of pricing the product. (By the way, ADP refers to the ticker symbol of the payroll processing company and CRM is the ticker symbol for salesforce.com.) The RTU license with subsequent annual fee is actually one of the newest (about 30 years old though) and preferred by the suppliers for the obvious reason that they get more revenue sooner.

Before choosing the means of revenue flow, the supplier decides on the end:

  • How much revenue do they expect to/need to take in to cover the software's development/marketing costs
  • Can they/should they
    • price it as a loss leader (take a loss on the hopes of selling something more profitable).
    • price it to cost (add a reasonable profit on top of the development/marketing costs).
    • price it to value (roughly related to the cost of doing whatever by other means plus a reasonable profit).
    • price it to the whatever the market will bear.

It reminds me of the old motor oil ad, "pay me now or pay me later." If SAP decides that the market won't bear 22 percent, a price umbrella raised by Oracle some years ago, it will drop back to one of the other pricing formulas or to one of the other revenue flow types in the illustration.

 


In the end, it costs the supplier $x to run the business and they have to take it in over n years to make it profitable. You still decide if that's reasonable, not the supplier. As I said back in June, you have the option of paying Time and Materials for any maintenance needs or choosing a third-party supplier such as Rimini Street.

 

I'll look at some of your other options in a subsequent post.



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