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.

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