I help hundreds of technology buyers each year to understand the impact of technology changes on their software contracts, but I also get questions from software providers about how best to price their products. Some are bringing new products to market and want to know how to maximize revenue, while others are struggling with obsolete metrics such as per processor and want to update their pricing for the modern mobile, cloudy world. The answer is usually to find licensing metrics that make their pricing value-based while balancing simplicity and fairness. The more value a customer gets from your product, the more they should be willing to pay for it. If you make your pricing too simple then you won't match value sufficiently closely, which will cause you to price yourself out of some deals and leave money on the table in others. If, OTOH, you try to match value too precisely you risk making your pricing so complicated that buyers will reject it, and you, completely.
For example, suppose you have a product that will help people do their jobs better, so you decide that charging for each user will be a good approximation for value. The potential problem is that not everyone will use your product the same, in terms of depth of functionality and/ or frequency of access. Your single per user price will be unfair to companies with long tails of light, infrequent users, for whom you'll therefore be too expensive. Conversely your pricing will be unfair to you when the customer is mostly power users. To make your pricing fairer you could have different prices for different categories of user, but then you risk being criticized for being too complex.
On Monday, SAP communicated that it will increase the price of standard support on new contracts by 5% from July 15, 2013, from 18% to 19%. SAP’s announcement claims that the increase is necessary: “In order to ensure the same high level of quality support in the future.” That justification is disingenuous, in my opinion. SAP already makes a very healthy profit on maintenance. (SAP does not report its margin on maintenance revenue. For 2012, it reported 81% gross profit on software licenses and maintenance combined.) Moreover, third-party support providers (3SP’s) like RiminiStreet can provide better support at half the price or less.
SAP’s other justification is equally unconvincing. It states that within the standard support package “there is ongoing expansion of value, for example a continuous flow of innovation through Enhancement Packs.” SAP reinvests 14% of its revenue in R&D, but I estimate that 90% of that goes on developing new products such as Hana that you have to pay again for if you want them. (SAP disputes this estimate but did not provide an alternative figure.) That would mean that Enhancement Pack development represents around 1% of revenue, insufficient to justify charging double what 3SP’s charge, let alone a 5% price increase.
Avoid the 2013 holiday rush – start your year-end software negotiations now! Have you just about recovered from several adversarial, transactional software procurement negotiations last month? Have you resolved to avoid a similar situation next year? Then Forrester’s Strategic Software Sourcing Playbook can help you.
Apparently 38% of Americans made weight-related resolutions in 2012, and 67% of people with gym memberships never use them. So my advice is to shun anything you’ve seen in a TV infomercial (“we called it Lunacy because you’d have to be mad to buy it”) and instead make your New Year's resolution to be more strategic and proactive in your software buying in 2013. Our Playbook, launched today, explains how to do that.
Reactive, adversarial software buying is ineffective in the new business technology (BT) world of self-provisioning, cloud deployment, and mobile access. IT sourcing professionals' colleagues bypass them in the sourcing process, while powerful technology vendors expect more revenue from them than they can afford to provide. Software sourcing professionals rarely have alternative suppliers that they can use as negotiation leverage, so you need something more than your natural charm and belligerence if you are to be effective. Forrester's solution is a strategic approach that aligns the commercial model for each supplier with its place in the enterprise's software sourcing strategy.
· Firstly, there was still a good focus on sourcing and procurement in the Empower event-within-an-event. IBM has preserved Empower’s best quality (and that of Ariba Live and Zycus Horizon, btw), which is that there is always lots of trends and best practices content, and not too much product plugging. Most of the event was aimed at marketing, selling, and servicing, but there was plenty for sourcing attendees too. For example, there were keynotes from the CPOs of AB InBev, Conoco Philips, and IBM itself about their priorities and how they are addressing them.
· IBM leaders, including Craig Hayman, General Manager Industry Solutions, gave a clear and credible vision of Smarter Commerce. Hayman portrayed his Buy, Market, Sell, and Service quadrants as discrete offerings sharing common principles and technology, rather than an engineered stack that only works properly if you buy it all — best-of-breed complements to ERP, not a rival suite.
SAP is advertising for a new Director Of Pricing & Licensing. The job description states “The Strategic Pricing Director is a key member of SAP’s Revenue Strategy and Pricing Group. Pricing is a critical component of SAP’s overall strategy and go-to-market activities.” Duties include:
· Develop and implement pricing strategies based on economic and competitive dynamics.
· Price products and services appropriately based on the value customers receive.
· Define and drive pricing strategy for new and/or existing solutions.
IMO, SAP does many things very well in the pricing and licensing domain. I cite it to other publishers as an exemplar of best practices in a couple of areas, such as its pricing by user category, use of business metrics for parts of the suite that deliver value independent of manual use, and tying maintenance volume discounts to conditions such as centers of excellence that filter out users’ basic support calls. However, SAP does have room for improvement, in terms of Forrester’s five qualities of good software pricing, namely that it should be value-based, simple, fair, future-proof, and published.
Considering those goals, and as an advocate for software buyers, here are some things that I’d like SAP to add to the job description:
Microsoft is gradually improving the way it allows for Bring Your Own Device (BYOD) and other scenarios in which many employees use Microsoft on multiple devices. We’re getting growing numbers of questions from Forrester clients about this topic, and while Microsoft is making its approach fairer in some areas, it's also making it more complicated. One problem is that different Microsoft product teams continue to invent new ways to handle BYOD that are OK for their product but are inconsistent with how other product teams handle the same situation. Sourcing professionals need to understand all the different rules, so that they can work with IT colleagues to create a BYOD strategy that balances technical requirements and licensing cost, to take advantage of the available flexibility while avoiding the potential pitfalls. For example, Microsoft has announced cheaper, better BYOD support for the Windows client OS, but you might face significant extra costs for Microsoft Office if you enable it for BYOD unless you take care to avoid them.
Of course the fundamental problem is that per-device licensing is an obsolete model, so Microsoft should really enable BYOD by allowing per-user licensing, at least for Enterprise Agreements. However, since that isn’t going to happen anytime soon, sourcing professionals need to be able to navigate the per-device rules. Here’s as simple an overview as I can create:
Oracle reported its results for the three months to February 29th yesterday, and it beat analysts’ expectations. Software license sales were up 15% from last quarter, and up 7% on last year’s Q3. The blogosphere’s “Oraclefreude” delight at its disappointing Q2 appears to have been premature. Enterprises’ insatiable demand for processing power and Oracle’s excellent products ensure a continuing demand for more "per core" license capacity of its flagship database products.
“Oracle is on track to deliver the highest operating margins in our history this year,” said Oracle President and CFO, Safra Catz, in the company’s press release. “Oracle can achieve these record margins as an integrated hardware and software company because we are focusing on high margin systems where hardware and software are engineered to work together.”
What does this mean for sourcing professionals considering Oracle deals in its important fourth quarter to May 31st?
Despite Oracle’s financial rebound, I’m still confident that sourcing professionals with leverage will be able to get better prices in the next three months than they’ve gotten before, provided they use that leverage wisely. Here are three reasons why:
Microsoft recently announced that it will change to its European currency pricing policy from July 2012, and the effect could be a 20% price increase for UK customers. It didn’t publicize the change, preferring to let its resellers tell their customers as and when the change affects them, so I thought I’d tell my readers what you need to know. Firstly, here is some background. Most global software companies have one master price list in their home currency and reset price lists in other currencies every year or even every quarter using then-current exchange rates. Microsoft has always taken a different approach, having set €, £, and other prices in 2001 and continuing to use the same exchange rate ever since. There are pros and cons to this approach:
· Pro: local prices are stable and predictable. In contrast, € and £ prices from other US-based vendors may rise or fall by 20% from one year to the next as the currencies fluctuate. (This is one reason why SAP’s revenue rises and Oracle’s falls when the € weakens against the $, as these price changes affect demand.)
· Con: European companies pay more than their US-based peers. This doesn’t matter so much if you’re only competing with domestic rivals, but global companies see and resent the discrepancies.
I’m always searching for new negotiation best practices and tips when I’m speaking with Forrester clients, but it's not often I find one when I’m relaxing in bed with an old favourite, recently rediscovered book. But here’s one that I hope you’ll find amusing, and educational, from a book written over 80 years ago.
The current Mrs. Jones did some “tidying up” over Christmas — her euphemism for moving my stuff from its organized filing places in her office and dumping it as a jumbled pile on the floor of my office. In amongst a number of unwanted books and DVDs, now available at very reasonable prices on Amazon, I found my ancient copy of Kai Lung Unrolls His Mat by Ernest Bramah. It’s a wonderful book — set in China at some unspecified date in history — and written, so the preface claims, in that country’s classical convoluted style replete with analogies, adjectives, and apophthegms[i]. Read this passage about the ivory carver, Chan Chun, and his lowly assistant, Kin Weng, buying some new tusks from the merchant Pun Kwan — I hope you’ll love it as much as I do.
Pun Kwan and Chan Chun began slowly to approach, the former person endeavouring to create the illusion that he was hastening away, without in reality increasing his distance from the other, while the latter one was concerned in an attempt to present an attitude of unbending no-concern while actuated by a fixed determination not to allow Pun Kwan to pass beyond recall. Thus they reached Kin’s presence, where they paused, the sight of the outer door filling them both with apprehension.
The proposed acquisitions of SuccessFactors by SAP, and of Emptoris by IBM got me thinking about the impact on buyers of market consolidation, in respect of the difference between dealing with independent specialists versus technology giants selling a large portfolio of products and services. Sourcing professionals talk about wanting “one throat to choke,” but personally I’ve never met one with hands big enough to get round the neck of a huge vendor such as IBM or Oracle. Moreover, many of the giants organize their sales teams by product line, to ensure they fully understand the product they are selling, rather than giving customers one account manager for the whole portfolio who may not understand any of it in sufficient depth. Our clients complain about having to deal with just as many reps as before the acquisitions. They all now have the same logo on their business card, but can’t fix problems outside their area, nor negotiate based on the complete relationship. It seems that buyers end up like Hercules, wrestling either with a Nemean lion or with a Lernaean hydra.
The acquirers' press releases tend to take it for granted that customers will be better off with the one-stop shop. Bill McDermott, co-CEO of SAP, said, “Together, SAP and SuccessFactors will create tremendous business value for customers.” While Lars Dalgaard, founder and CEO of SuccessFactors, talks about “expanding relationships with SAP’s 176,000 customers.” Craig Hayman, general manager of industry solutions at IBM, said, “Adding Emptoris strengthens the comprehensive capabilities we deliver and enables IBM to meet the specific needs of chief procurement officers."