Thinking About Buying ERP Software? What is Your Preferred Pricing Model?

Let me paint a picture for you to ponder. You are a director of IT or a project manager leading your very first software selection project. You have combed the internet searching for the best ERP software solution for your organization. Thus far you have reviewed online software demonstrations, requested quotes, and you are now sitting at your desk in the midst of what appears to be a paperwork landfill. You are confused, frustrated, and overwhelmed by the vast array of pricing models presented to you by the various ERP vendors and VAR’s you contacted. You question how this sea of numbers will ever be intelligently translated into a cohesive summary which can be presented to upper management for budgetary approval.

Does my scenario sound a bit too far fetched or does it sound much to close to your own personal reality?

There is no mistaking it. Pricing for small to midmarket-based ERP software is confusing. I work for an SMB ERP software developer and I am confused. My heart goes out to the first time project manager who is forced to deal with the multitude of pricing options available. Even though comparing vendor pricing is technically possible, doing so can feel like a monumental task. And while I cannot personally solve this dilemma, I can offer some basic information on the various pricing models.

The ERP Pricing Model Cheat Sheet

Site – Pricing is based on location and not the number of actual users.
Module – Pricing is based on individual modules selected, i.e. accounts payable, inventory control, or scheduling. Modular based pricing can be further based on an unlimited number of users, a group of users, or by individual users.
System – Pricing is established for the entire software system, which should include all available modules. This system based pricing can be based on a per user amount or base on an unlimited amount of users.
Named User – Pricing is established based on the total number of identified software users who access the system. In this scenario, each individual user constitutes an individual user license. In other words, if you have fifty employees who access the system, you would need to purchase fifty licenses.
Concurrent User – Pricing is based on the maximum number of users which could potentially access the system at any given time. In this situation you may have fifty total users, yet no more than thirty users would be logged into the system at once. Therefore the contract would be established for thirty users and not fifty as in the previous example.
Month – Per month pricing is typically used in a SaaS or Software as a Service environment. In this scenario, you are leasing or renting the software for a monthly fee. This monthly fee may be based per user or for an organization.
Year – This pricing structure is similar to per month, but with an extended period of time between invoices.
Transaction – Per transactional pricing may also be utilized in a SaaS environment. The pricing is based on the number of transactions performed and ignores the number of users or modules accessed.

Let me further complicate matters by bringing in minimum user requirements and discounts. Regardless of the pricing model utilized, some vendors will also require you to purchase a minimum number of user licenses or buy in buckets of licenses. And once you finally obtain your total price, it may actually be a list price with an option for negotiating discounts.

Feeling frustrated yet? I have not even begun to discuss annual maintenance which can range from ten to twenty or even thirty percent per year in additional costs. And once your ERP vendor provides an annual maintenance amount, you must determine if it is based on the list price or the discounted amount if applicable. Finally, you’ll need to follow up by confirming if the annual maintenance is subject to increase or if it is locked in for the duration of the contract.

So many ERP vendors, so many pricing models, and yet there is so little time to figure it all out. Take the time. It will be worth it when you actually start to calculate and compare the ERP vendors’ total cost of ownership.

What provoked this review of ERP software pricing was a comment from someone in our sales department. In passing, he mentioned a prospect had mentioned that a few ERP vendors refused to give guidance pricing in their initial discussions with him. While my sales representative he did not know the vendors’ reasoning for having such policies, we were both baffled by their alleged actions. I stress alleged, because we have no way of validating these statements.

Full disclosure or not, creating an apples to apples comparison of ERP software is difficult due to the various pricing models available. Regardless of the time it takes to sort it all out, the time is well spent.

Are You Looking for a Horizontal ERP Software Package or an Industry Specific Solution?

A few years ago I performed an onsite ERP software demo for a small manufacturer. It was a good demonstration, the people were nice, and it seemed like a good functional fit. I left feeling positive about the day and positive about the company. The company eventually purchased our ERP software, implemented, and they are now part of our user base. During the implementation process one of our executives asked the decision makers why they selected Enterprise 21. The answer was that we demonstrated an industry solution, not just software. And that instead of arriving with a generic demonstration, we provided examples and terminology for their industry and their business.

This makes me question the value of a solution based ERP offerings. Most tier one and two ERP software products are not industry based. They have vertical markets in which they focus and excel, but certainly they are not considered an industry specific package. And while my software definitely has a stronge presence in several industries, it is also not an industry specific package.

On the flip side of this thought, I often hear prospects say they are “only looking for an industry specific solution”, which is code for I only want to consider packages that sell specifically to my vertical market. These statements completely and totally confuse me from a logic standpoint. If I am leading a software selection project and I limit my options to such a small segment of an otherwise large product mix, how do I really know if I am finding the right solution?

From my own personal experience, I believe companies and/or project managers who focus solely on industry specific packages fail to fully document and articulate their requirements, as well as even understand their true requirements. They focus on a smaller segment of requirements that are very specific to their industry and make that limited set of criteria their benchmark. They limit themselves from understanding the true depth and operational range that quality ERP software solutions offer.

Why would I have this opinion? Because I have performed software demonstrations for these same companies and their requirements list always appears to be very limited. The companies thought this limited list was all that was needed in their new software package. When I’ve asked about other criteria or functionality that may be relevant, the answer is many times “Yes we need that too but we’ve not thought about it yet.” Therefore it was not part of their original requirements list and most likely will not make it on their list.

I believe they have not thought of these items yet, because they have forced themselves into a small box that is limited to the existing knowledge of software specific to their industry.

While I do not believe my theory translates to every industry, I do believe it applies to many industries. And along these lines, I also do not believe every package is suitable for every industry. There is something to be said concerning process-based manufacturing software and how these packages differ from discrete-based ERP solutions. There is also something to be said for installing a software package weak in engineer-to-order functionality in a company that operates in an environment that is 80% ETO. It will not work and the relationship is destined for failure.

While there is real value in reviewing packages designed for a specific industry or operational footprint, I see little value in segregating a search to only industry specific software unless an industry is so unique that there is in fact no other choice. Unfortunately, I do not believe it is always easy to make that distinction when it is your company and your industry.

Pimp My ERP Software

Last week I was in my corporate office reviewing some of the new functionality that was recently added to our Enterprise 21 ERP software. Before I could stop myself, I blurted out “Now I can pimp my ERP”! So maybe Pimp My ERP Software won’t be the next MTV hit, but the idea of making an ERP system “your own” is becoming a reality.

While I am young enough to know MTV’s infamous Pimp My Ride, I am also old enough to remember the days of DOS-based business software and ever so slow customizations and report changes. I think I can speak for all of us when I say we breathe a collective sigh of relief that the days of DOS are well behind us. Today, ERP software is truly becoming more user friendly. Or shall I say it is becoming more personalized and it is looking much more like how you - the user – would design it. ERP users are no longer a statistic or an unknown customer far removed from the developers. Users are front and center in both global functionality changes and more company or user specific personalization of the ERP package. They are becoming front and center because they are becoming their own developers.

Ten years ago I would not have envisioned the ERP packages of today. I still viewed ERP software as “the package” that was used to help run operations. I certainly did not view ERP software as a tool that is used to help boost business growth, as an assistant to aid in compliance support, or as an overall driver of enterprise wide operations. I say that because ten years ago you lived with the package you selected during your evaluation project. Good or bad, it was your new found friend and there was little you could do to quickly change it. Now, with many ERP software packages available on the market, the user personalizes the ERP experience by adding bookmarks, designing their own inquiry screens, relocated or deleted columns, sorting data, and adding hot buttons. And when I say personalize, I mean through existing software functionality and not through modifications to the source code. While these features are not within every ERP package, they are in some packages already. As a user, I love the ability to make our package “my own” and personalize my environment to meet my own quirkiness.

While I know not every user will want to pimp their ERP software, many will want to personalize their work environment. I strongly believe the more you “pimp” your package, the more benefit and satisfaction you will derive.