Here is a question from microeconomics 101: What is the quickest way to improve margin? The simple answer is to raise prices. A better answer is: “Whoa, Nellie.” This raising-prices idea isn’t really that simple after all. It might even be worth a blog or two.
Of course, we all had a little sympathy for SAP, as it attempted to push through a 5 percent increase in maintenance, whereas many customers were not quite sure where the extra dollars were going. So, let’s examine the wonderful world of ERP pricing, which consists of three components.
Maintenance: We might as well start here. Most ERP buyers pay maintenance fees. For maintenance, you get a number of things:
- The ability to call the help desk when you have a problem
- Bug fixes (hmmm, you would think that if you got the bugs for free, you might also get the bug fixes for free)
- New features in the software (as opposed to new modules; this is tricky and we have discussed this before in another blog)
- New updates for tax codes, HR requirements, legal requirements
Could you buy third-party maintenance? Sure, but I wouldn’t recommend it. An ERP system has a lot more moving parts than a washing machine (even with an extra spin cycle).
Now the amount you pay for maintenance also depends on the amount of service you want. Do you want 24×7 service? Do you want to have a guaranteed call back within two hours? Can the vendor dial into your location? Do they have a specialist who is assigned to your account? (Even better – how many accounts are there per specialist?)
So, at the end of the day, it is only OK to raise your prices if there has been a dialogue with the customer around “pay for play.” Suppose you were at a fine restaurant, and you order the steak for $30. After the salad course, the waiter tells you that the prices were just raised to $40 (well, at least it would be less cholesterol per dollar spent).
Consulting: Here, you obviously have a choice, since most ERP vendors have third-party consulting partners. You should ask the ERP vendor for its pricing structure, i.e. what titles are represented at what prices. Then you can compare it to the third-party vendor. This will help you make a choice. Two points: 1) It is always a good idea to have some consultants from the ERP vendor. They can get to the developers faster. 2) Check resumes and references – in fact, have your most senior consulting candidates make a stand-up presentation to your team. See how they do on their feet.
Software: Many ERP vendors today offer named pricing. Some still offer concurrent pricing (i.e. only a certain number of users can be logged on at once).
Again, some advice: 1) Named users should be grouped by roles they play – transaction users, decision support users and self-service users are all different. 2) Provide for contingencies up front: What if you buy a company, divest a company, reduce staff, etc. Again, you can get a lot information by examining deals across different vendors.
Bottom Line: Be precise about ERP pricing, both as a new customer and as an existing customer. Make sure that you are getting real value for your investment.
