ERP vendor pricing: lifetime customer value

Dennis Moore has an interesting post on pricing of ERP systems, specifically on why a vendor might be willing to accept less than the maximum amount that a customer is willing to pay.

He lists a number of reasons, such as:

• Ability to accelerate a deal into the current time period, which helps the vendor meet certain financial goals or pushes the salesperson into the next tier of commissions.
  
• Use of the customer as a reference, which helps the vendor in future deals
  

Read Moore's entire post on this subject, as it is a good primer on how vendors think about deals.

Lifetime customer value
In addition, I would add another thought: vendors today increasingly look at deals in light of the total lifetime value of the customer. Lifetime customer value includes not just the upfront license fee but the margin on any professional services, plus (and this is the biggie) the ongoing maintenance revenue stream.

I think that SAP and Oracle in particular view pricing of the initial license in terms of covering their costs of sales and getting the customer into the maintenance revenue stream where they really make their money over the lifetime of the relationship.

In addition, gaining the initial sale puts the vendor in the position to sell that customer additional products and services in the future.

The concept of "total customer value" explains why Oracle, for example, has been gobbling up other vendors: Oracle is buying customer relationships and it is also acquiring products that they can sell into other customer relationships. It's faster and cheaper than selling new customers one at a time or developing new products from scratch.

Think: total cost
What does this mean for buyers? Just as the vendor considers the lifetime customer value, the buyer should consider the lifetime vendor cost, or the total cost of ownership. Understand that the initial license cost is usually the smallest part of the total cost: implementation costs, ongoing maintenance fees, and ongoing cost of internal personnel and contractors needed to support the system make up a much larger percentage. (For details on what it takes in terms of internal staff to support an ERP system, see our research at Computer Economics on ERP Support Staffing Ratios).

Anything you can do to manage these costs, or drive contract terms that limit the vendors ability to increase them will pay off much more than haggling over a few percentage points in discounts on the initial license fees.

Related posts
Why the recession is good for Oracle
Total cost study for an open source ERP project

No recession for Rimini Street third-party maintenance business

Rimini Street, which offers alternative maintenance and support contracts for Oracle and SAP customers, reports today that its books in the first half of 2009 increased four-fold over the same period last year. It gets better: second quarter bookings increased six-fold over the same quarter last year.

In further evidence of a surging business, Rimini Street reports:

• A four-fold increase over last year in its J.D. Edwards client base
• US-based staff growth of almost 25%, while expanding its support operations into Europe and Asia-Pacific
• Signing up its first SAP clients, complementing its support for Oracle JDE and Siebel customers
• Delivery of tax and regulatory updates ahead of the "primary software vendor’s planned release date for similar updates"

It's remarkable to do all this in a time of economic recession. But the recession may in fact be helping Rimini Street's business as Oracle and SAP customers are pressed to look for alternatives to inflated maintenance fees from these two vendors.

I also note Rimini Street's report of a strategic investment from private equity firm Adams Street Partners. The money will be used to fund Rimini Street's global expansion. Apart from this, however, to me this is a serious endorsment of the third-party maintenance model in general, and Rimini Street in particular. No doubt, Adam Street did their due diligence. If they came to the conclusion that third-party maintenance is a worth investment target, will others be far behind?

I hope not. I would like to see other private equity firms funding other third-party maintenance providers as well. The more the better.

Rimini Street's press release has details.

Update, July 31: Bob Evans at Information Week has an excellent article on the excessive nature of Oracle's and SAP's 22% maintenance fee practices and the door that this has opened for Rimini Street, and hopefully others. One tidbit:

Some CIOs object, usually in language most charitably described as "colorful," that because the world's two largest enterprise software companies have built such wildly successful cash cows out of their support and maintenance businesses, SAP and Oracle have completely lost sight of the customer connection in that context. Most grating of all to these CIOs have been public comments made separately by top-level executives at the two companies indicating quite explicitly that whatever customers might or might not think about the 22% fees, that revenue is indispensable to the stock valuation of each company and so cannot be changed.

This article should be required reading for any enterprise software buyer or CIO.

Related posts
Rimini Street, SAP, and the future of third-party maintenance
Rimini Street to provide third-party support for SAP
Legal basis for third-party ERP support industry