Category Archives: pricing

As the year draws to a close

Hopefully, most of you are done with work for the year.  But for those of you about to close end of year, firesale-type deals in the remaining 6 days of the year (the end of the year is even a Thursday, so you don’t have to “work” a weekend if this is your fate), here is a list of articles on how to get the most out of your transaction time:

Start with fundamentals on negotiation.  Think outside the box.

Then go through the basics on firesales.  If you want more, buy the Firesale Concall Recording.

Understand pricing, and when it might pay to avoid maintenance costs.

Start your deals from good templates.

And, lastly, consider the reasons for agreeing to renegotiating deals.

To my faithful readers: Thank you for listening to me for another year.  I hope you have a very joyous holiday season and a happy New Year.  See you in 2010 (unless something really awesome in the licensing world happens between now and then).


This Week on The Web 2009-09-13 (my birthday edition)

It happens to be my birthday weekend and between eating some great food, playing Guitar Hero with my wife and hanging with the family, these are the things that happened around the web this week – maybe you already read about them, maybe you need to again – there were some REALLY great discussions going on.  Come join the party on twitter (follow me here and you’ll join the conversation live.)

I also realized that many of you might have no idea what you’re seeing below.  Sorry.  These are “tweets”, 140 maximum character messages sent via Twitter.  Within the Twitterverse individual users follow others and have followers (think of it like overlapping Venn diagram circles).  To read a tweet, you have to wade through a bit of jargon used to make the most of the 140 character limitation.  “RT” for example, is shorthand for “Re-tweet” and the @____ is the username of some other individual on Twitter.  Combined together, then, “RT @_____” means that someone else wrote a tweet that I found important and I now want to forward along to my followers.  The URL’s are then also shortened by shortening services like to make the most of the character limitation, too.  Lastly, you might see “hash” identifiers “#______” which are ways to tag tweets of a particular flavor for easy searching later and “<” which means that I am commenting on what came before it.

This Week on The Web 2009-08-16

The things that happened around the web this week – maybe you already read about them, maybe you need to again:

Cnet author advocates theft

I’m simply stunned by a recent article written by Cnet columnist Rafe Needleman.

In his post, he blatently advocates buying “lesser” versions of Microsoft products to take advantages of the discounts available to certain classes of users, regardless of whether you actually fall into that user class.  His cavalier attitude towards the vendor (telling his readers that Microsoft probably doesn’t check up on usage) and the user (suggesting that users who pay the appropriate price for their user class are “suckers”) is abhorent and I’m frankly disappointed that the editors at Cnet allowed this garbage to see daylight.

I’ve responded twice in the comments (as “negot8or” if you care to read them… once on page 1 and again on page 2).  The general gist of my response is that if you don’t like the pricing for a particular product, don’t buy it.  Vote with your pocketbook.  Vendors who don’t sell enough software will either drop their price or drop out of the market.  But buying something you’re not licensed to use and using it anyways is a form of theft (“software piracy” if you will).  Software has historically been sold on the basis of end-user value.  It’s the right of the vendor to charge whatever they want.  Stealing, in any form, isn’t justified because there exists a cheaper price somewhere else – or for someone other than you.

As much as I advocate for better software licensing terms and more transparency from vendors, I do not believe in taking what isn’t yours.  I hope you agree.

Pricing Issues

In the contracting duality of terms and pricing, I spend the bulk of my time here talking about terms.  The reason is generally simple – terms are fairly common across contracts.  Pricing, on the other hand, appears deal-specific and too different to really discuss in detail.  I simply can’t tell you that a 30% discount is what you should be looking for all the time.  Sometimes 10% is good (for certain vendors) and sometimes 80% is good (for other vendors).  Without violating various confidentiality provisions – and without knowing other specifics about a particular deal (such as its size, duration, etc) – I’m a little boxed in.  But I did realize that there are a few things you can learn about pricing which will help you, regardless of which side of the fence you’re on.

First, you need to go read Joel Spolsky’s excellent article: “Camels and Rubber Duckies“.  This will give you the starting point for understanding how pricing should be created.  Eric Sink uses a similar breakdown to understand the economics of how software is priced.  Next, you need to understand the four basic ways software is licensed.  This article by Erik Keller from 2007 in Manufacturing Business Technology is a bit dated, but hits the fundamentals.  And even within the SaaS model (and, in fact, the traditional model), there are different metrics upon which the licenses can be measured.  Check out this optional article by Jason Rothbart from January 17, 2009’s ReadWriteWeb.

So armed with an understanding of how software is priced, we then need to move onto maintenance and support.  Let’s start with the basics from this 2006 Information Week article (still relevant data).  What we’ve got these days is a system in which we expect to pay a base fee for the license plus an annual support fee… or we pay the leasing/SaaS model of “license renewals” for each year of use.  Regardless of how you slice it, there’s an annual fee component to the deal.

Forgetting about the tax implications of mandatory maintenance in many jurisdictions, I instead want to focus on a very specific pricing issue – the increase. Yup, all of this build-up and what I really want to talk about is the language in your various license agreements and maintenance documents that allow for increases in license and/or maintenance fees year after year (you need to understand how license fees are created to really dive into increase language).  This is a hidden gem for vendors and is often overlooked by licensees, simply because people don’t think about its effect on price (because it’s an increase on future pricing and not today’s pricing, it’s sometimes not deemed relevant or worrisome).  I believe that license and maintenance fee increase language is dangerous at best and disastrous at worst.  Here’s why.

Assume for the moment that you’ve paid $1,000,000 for your license and that you have a 20% annual maintenance fee.  There’s no more “warranty grace period” so, interestingly enough, the vendor actually wants $1,200,000 that first year.  Well, to start, Vinnie Mirchandani over at deal architect will tell you that maintenance is overpriced.  I agree.  For $200,000, I would expect at least 1/5th the value of the license to come back to me that first year in maintenance and support.  In other words, is the software SO BAD that it requires 4,000 hours of support by a $50/hour technician for that year?  I hope not.  Or, alternatively, are you getting a 20% increase in features and functionality in the next release of the software that year?  My guess is that the answer to both questions is “no”.

So 20%, on its face, seems pretty unreasonable from the get-go (you can also just think about it in terms of re-licensing costs… do you want to have effectively paid to re-license the software in 5 years?).  Now let’s factor in the increase.  These range from 3-15% in most license templates today.  Even at 3%, that would equal a $6,000 increase in the $200,000 fee from Year 1 to Year 2 (at 15%, that increase would be $30,000).  The most common rationale given for increases is a cost-of-living (economic) excuse for the support people.  The second most common is the same argument, only this time, it’s the cost of goods and/or materials.  (My personal favorite counter argument is to agree that pricing should be tied to the economy, and then re-write the language so that “the pricing changes based on the CPI-U All-Items percentage for the prior year”.  This allows it to actually go down.  A savvy vendor won’t ever allow this.  But then their excuse evaporates, too.)  Thus, I’ve had to concede increases in many cases.  I’ve even said before that for 3-5 year deals, I try to get increases removed for the term of the agreement (it’s the trade-off for a long-term deal).

But what about increases not tied to the economy, rather the simple cost of doing business?  Should customers be saddled with the expenses related to having to change a product because the vendor’s industry is regulated by the government?  Should the end-user, mid-term on a contract, be expected to pay for changes resulting from something completely outside of the customer’s control?  I’m thinking specifically in the telecom industry (and others) – where federal regulations that result in fees typically find themselves trickled down to the customer.  I’ve said it before and I’ll say it again… the telecom vendors don’t have to pass along the fees.  They could pay them themselves.  But they don’t.  If you’ve ever seen a line-item for cost-recovery fees, that’s what we’re talking about.

So the question is – should you accept these pass-through fees?  Or, more specifically, should you accept increases in these pass-through fees?  I can understand that there is an economic argument (as above)… that it’s an increase in cost for something you thought was fixed or sunk before the contract was signed.  But isn’t it just a risk of doing business in any particular industry?  Don’t we, as automobile owners, for example, take the risk that gas prices are going to increase or that we may lose our jobs tomorrow?  And that if we decide to buy a car today, we accept those risks and have to deal with the consequences if the situations change?  Why should I have to protect not only myself, but also my vendors, from the risks (and costs) of doing business in their industry?

Don’t Pay for Enterprise App Maintenance

I completely agree with David Dobrin.  It’s hard to convince people to do it, of course.  But read his logic.  1/200th.  I think that is about the right threshold – it might even be a little low (my life insurance policy is about 1/500th… my car is about 1/166th – but doesn’t take personal injury into account… my home is about 1/1600th).

Hmmm… the more I think about this, the more I think it would be really easy to convince my clients of this.  Anyone have a counter argument? calls for End of Maintenance

Below is the contents of an internal memo CEO Marc Benioff shared with Vinnie Mirchandani (and posted on his blog: deal architect).  I’m pasting it here for simplicity’s sake and because of the power of the message itself.

“For ten years, we’ve been driven by a simple vision: The End of Software.  Now it’s time to take on a new challenge: The End of Maintenance.

Let me tell you about a customer that I met on our Cloudforce tour. This customer currently uses Siebel software to run her call center.  She pays more than $15 million a year for the privilege of having to implement the updates that Siebel sends her.  That does not include backup. Or disaster recovery. And of course, it does not guarantee that she will be using the latest technology.  The maintenance agreement only assures her that her outdated software will continue to work.  She is paying tolls on a road to nowhere.

We can help her, and many other customers, and deliver much more for a fraction of what they currently pay in maintenance. It’s time to open up a new front in “The End of Software”– one that is long overdue.

It’s time for The End of Maintenance.

Every year, companies spend billions on maintenance fees and get relatively little in return. Maintenance fees cover updates that are mostly  patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive.  Companies pay to keep the past working and they end up doubling down on technology that can never keep up with their needs.  The fees that companies pay have actually been rising, from something like 17% a few years ago to numbers more like 22% today. Every four or five years, companies are paying for their software all over again.

It’s time to set these businesses free and make them successful in the Sales Cloud,  Service Cloud and on our platform.

Our new mission begins at a critical time in the economy, when companies are questioning conventional wisdom as they never have before.  That, of course, extends to their IT budgets as well. The CIO is in a tough spot right now.  Corporate budgets are tightening.  And our rivals in the legacy client-server world are using this opportunities to extract more money from their customers by raising maintenance fees.  I call this phenomenon “the compression of IT” and it resonates with just about every CIO I speak with these days.

We have a better vision. We sell our customers a service and every customer is able to use the latest. Innovations are included. Upgrades are automatic and invisible. Customers’ intellectual property of customizations and extensions is rigorously preserved, and carried forward without disruption.

The service gets better, not just less buggy. That’s not what people are getting for all those fees that supposedly buy them “maintenance.”

It’s time to set these business people free: to give them the experience of being wildly successful in the Sales Cloud, the Service Cloud, and in their own unique applications that they can build on our platform. This is the time to do it, because this is when people need it: their IT budgets are tight, their business situations are critical, and their old-world software vendors are taking care of themselves instead of meeting the needs of their customers.

We’ve raised people’s expectations for better alignment of business value with IT cost. We’ve earned our leadership position in enterprise cloud computing. It’s time for us to set people free from paying more and more to get less and less. It’s time for The End of Maintenance.



Internal Business Purposes

How many licenses to your core database software do you own?  I ask about this specific type of license because database software is typically expensive (relatively speaking) and customers license an exact quantity of licenses required based on actual use.  In other words, if you need 5 database servers (or instances), you pay for 5 licenses.

Of course, it’s never that simple.  Because your IT department usually also wants a development server for each database instance.  This makes sense – development should be done separately from production (you wouldn’t want some experiment in design to bring down your production server).  Oh, and what about testing?  This is the middle-of-the-road between development and production… where something that your developers believe is ready for production goes to receive significant QA attention.  That’s yet another set of databases.

So, now we’re talking about 15 licenses: 5 production + 5 QA/test + 5 development.  If 5 were expensive, imagine what 15 could become.

Database software developers understand this dilemma.  They know that if you’re really making use of their products, whatever you have in production has to be supported by nearly as many dev/test environments.  Back in the day, this was usually a pretty simple situation – you asked for, and usually received, “free” dev/test licenses.  I say “free” because they were never really free, they just didn’t separately price them.  You paid for them then, just as you pay for them now.  The difference is that the cost was built into the production licenses back then because the hardware wasn’t strong enough to support some of the tricks that can now be used to run multiple databases within a single hardware environment.  Once the hardware was strong enough (about 8 years ago), savvy licensees didn’t actually need 5+5+5 … they could find ways to do 5 + 3 + 2 or some other combination in something other than a 1:1 relationship.

The net result is that these same savvy licensees started asking for discounts on the initial 5 production licenses because they knew they were no longer needing the triple-play effort of that single license.  Instead, they argued, they only needed a few “extra” licenses (now really for free) because it was understood that to make use of the product, you needed these extra environments.  They just didn’t need them in the same quantities as before, so it had the appearance of being less of a freebie than before.

Software vendors reacted in the best way they could – through changes in language.  The phrase “internal busines purposes” became the expected response.  “Yes”, the vendors said, “you can have a few extra licenses – but only for internal business purposes.”  The meaning wasn’t always clear, of course, but the intent was to say that the licenses you purchased were the ones that could see the light of day (be used by regular users, etc), but that the extra licenses were only for back-room development and testing.  You were signing a license agreement confirming that you wouldn’t take these fully-functional licenses and put them into production.

No problem.

Until ASP/SaaS offerings came along.  Now you have databases that are serving data to the world 24/7/365.  Licensees still need dev/test environments… but these are now potentially available online, too.  And, in rare cases, serve as the backup production environment in the event that the usual production environment goes down.

Has this really created a problem?  No.  The case remains that licensees should have frank and honest conversations with their vendors about how they intend to use the products rather than try to sneak some form of unintended or unexplained use by the vendor.  If licensees want “free” licenses for dev/test, they should expect to see (and respect) “internal business purposes” language.  And they should discuss the possibility of needing to put a dev/test server into production in the event of a disaster.

Lastly, licensees should also remember that such licenses are never free.  Whether you have a line-item cost that shows you paying full-price, partial-price or no-price, the cost is still baked into the deal in some way.  However, one key advantage to calling out the pricing specifically for dev/test environments is the ability to get them excluded from maintenance costs – as there should be no need to pay for maintenance on a dev/test box needed to provide support for a production server.

Firesale Conference Call: Thursday, November 20 @ 5pm ET

If you haven’t already started getting calls from your vendors with better-than-average offers if you’ll just buy now, you’re bound to get them soon.  It’s called the End-of-Year Firesale… when quotas are important and sales numbers appear to make or break careers.  How are YOU going to respond when the calls start to come?

Join the Licensinghandbook Blog on Thursday, November 20 at 5pm ET, when we will be hosting a procurement-related conference call session on how to negotiate through the typical end-of-year deals commonly seen (and the expected “extras” as a result of the current economic state).  Stephen Guth from the VMO Blog will get the topic rolling, but the remainder of the time is for discussion amongst the participants.  We’re expecting a great session and one filled with dozens of hints, tips, tricks and tactics.

For this reason, participation is by-request-only for buyers via the form below and will only be guaranteed to the first 25 registrants.  The session will be free to attend, but you are responsible for your own long-distance phone charges (the call is to a number within the continental US). Please make sure your e-mail and contact data entered below are correct, as this is where the participant details will be sent!

Please fill out the form below to register: 

Creative Financing

When I was a kid, I lived about a mile from K-Mart.  There was no such thing as Wal-Mart or Target.  But then again, Diners Club was still a viable charge card (different than credit, charge cards are “pay entire balance” cards, like AmEx) and you actually had to have a decent credit score to qualify for a line of credit.

K-Mart had to come up with realistic ways, then, to satisfy the needs of its customers with respects to offering them the ability to buy when they didn’t have the means at hand.  Their response was lay-away.  This wasn’t a unique offering, department stores had offered similar programs for years.  But it was effective none-the-less.

For a small administrative fee, anyone (regardless of your background or history) could put one or more items into storage at your K-Mart (items actually came out of inventory).  On any periodic basis, prior to a scheduled end-date, you could pay against the remaining balance.  When the balance reached $0, you received your items.  The risk to K-Mart was your failure to pay and the restocking of the items into inventory after such item was obsolete.  But this was a simpler time and items weren’t replaced as quickly by the manufacturer.  Adjust the timing so that you can’t keep it in lay-away forever and K-Mart was at least assured that if you didn’t complete the transaction, they could sell it to someone else.

I’d forgotten about lay-away until I saw a K-Mart commercial the other day where it was the focus of their advertising.  The obvious assumption is that this is a result of the current economic state.  People don’t have (or want to use) available credit for purchasing.

I wonder if the same is true for businesses – ones who are concerned not only about credit (though most thing are purchased under contract or PO requiring payment like a charge card – at the time the invoice comes in) but moreso about the availability of a vendor to deliver long-term on the promise of providing services, since the traditional software model is pay-first-then-pray-it-works.  So, does the opportunity exist for creative vendors to come up with ways to spread payments out over time without creating real problems for the vendor or the customer?  I think so… but I’m not sure what they would be.  Models used by services providers (pay as services are delivered) only work if you can measure it that way… but what about standard software vendors?  What choices are available for them?  Leasing?

Your thoughts in the comments!