Check Your Business Model Before Buying ERP Software

By Rebecca Gill
Expert Author
Article Date: 2008-09-25

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.

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About the Author:
Rebecca has over a decade of experience in accounting, operations, project management, and enterprise software solutions. She is currently serving as vice president at Technology Group International (www.tgiltd.com). TGI is a leading provider of Enterprise 21 (ERP solution) and related enterprise business solutions for manufacturers and distributors. Rebecca also authored TGI's Software Selection Took Kit, as well as published a number of articles in both technical and industry specific publications. Read her blog at ERP Etc..


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