Category Archives: pricing

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.

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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: 
Name:  
Email:  
Company:  
City:  
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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!

Consortia – the other side

Jason Busch over on SpendMatters was talking recently about consortiums.  He was pretty positive about them – and praised their use as the “easiest way to save money while improving internal customer satisfaction inside a company”.

I’m not as convinced.

A few years ago, I was working for an organization that wanted to join a buying consortium.  The proposed result would be a buying entity that would supposedly garner savings as a result of larger purchases – thus passing along the cheaper per-unit costs to the consortium’s members… sorta’ like a Sam’s Club, Costco or BJ’s Warehouse – just at the large company level.  On its face, this sounds like a great idea.  Pay a small membership fee (someone has to get paid to manage the relationships), get large savings in a number of commodity purchases (paper products, general office supplies, etc).

Oh wait.  Did I say commodities?  Yes, yes I did.  Commodities are an excellent use for consortia buying.  They’re ubiquitous (everyone needs toilet paper and almost everyone’s buying the cheapest they can find), relatively easy to source (and hard to screw up), and bulk quantities clearly reduce overall expense.

But what if your consortia wants to offer something else… say, intellectual property?  Software, for example.  Now I think there’s a problem.  The member companies no longer have identical interests.  Your organization wants Exchange email… mine wants Groupwise.  You want an enterprise license … and I do, too, but my enterprise is 3x bigger than yours.  Consortia buying stumbles in the face of diversity of interests.

Another area where I personally had a lot of issues was the realm of cell phone and long-distance telephone plans.  The consortium wanted a cut of the plan revenue.  I didn’t want them to get money from me this way, as I would prefer to have more cost savings straight from the vendor.  Oh, and the consortium was buying a bulk group of “minutes” that were then allocated to the members.  If I didn’t meet my minimum usage requirements, I had to pony up (which is normal).  But the twist was that if any other member organization didn’t meet their minimum, I was also responsible for helping cover the shortfall.

So, how did I find out about all of these nits in the deal?  Well, me being me, I asked to negotiate the contract(s).  And what I got in return was a lot of static about how the contracts were already complete and that I simply needed to see/sign the Member Enrollment agreement to add us to the consortium.  I said no thanks – that I had specific needs and I wanted to have my own contract (where we could/would selectively incorporate terms from the consortium’s agreement).  Boy did that go over like a lead balloon.

What I learned by reading the consortium’s agreement (which they originally didn’t even want to give me) is that I’m ultimately paying for someone to negotiate a deal that’s good for them, not me.  When I wanted to change the terms with the vendors, they, of course, balked, too (they thought they had done-deals with the consortium and its members).

So the net result is that I’m not a huge fan of consortia buying.  Consortia are essentially negotiation and contracting outsourcers.  I don’t need help getting discounts or better deals… and I definitely don’t need “help” that only really benefits the consortium organization (and not the consortium members).  But I do see value in using a consortium to get the bulk-quantity ubiquitous products of everyday office living.  I suppose, as all else in life, the key is moderation and to read before you sign.

Timing is everything in your purchase

So it’s no secret than I’m an Apple fan… and they released the new iPhone 3G yesterday. On dozens of message boards across the world, people are actually complaining that they own a 2G iPhone (the original model) and that Apple won’t upgrade them to the 3G for free.

WHAT?!?

Do we expect this kind of treatment in any other area of our lives? Even in the business world where we TRY to get current price paid to apply to future deals, how many times are we actually successful?

The answer, of course, is not many. Why? Well, because a business that sells you something is hopefully selling it to you for the cost of good sold plus a good (but not gouging) margin. To give you a NEW product without further payment eliminates the margin, thus eliminating profit, thus eventually forcing bankruptcy. Not exactly the successful business model taught in school.

We don’t expect it with our homes or other personal property (try taking your computer back to Best Buy/Dell/Apple/etc for a “free upgrade” and see what they say). But somehow, folks expect it with phones.

Maybe its because we feel like we’re not getting the value out of the technology before it’s been upgraded on us. That in the past, there used to be some significant time period before a new version would be released (just like what we see in the software world). But the truth remains that we have the ability to refrain from purchasing at all. Inasmuch as I love new Apple laptops, I only get a new one every 5 years or so. And I try to schedule my purchase so that I feel like I’ve gotten value (by timing it so that I buy the latest one released, I hopefully ensure that a new one isn’t coming out tomorrow).

But I still feel a pang of regret when the new ones come out. The same is true for cars. When do you buy a new car? When should you buy? Well… if you like the best features, the most advanced tech, the latest and greatest… you buy in August/September, when the new model year comes out. If you like the best price and are willing to sacrifice the lastest-and-greatest, guess what, you buy at the end of the same time… September/October, when the new model year comes out and you get the most recent old one at a significant discount.

Live with your purchase decision, though. Plan it well and then cope with it. But don’t expect your vendors to give you a free upgrade if you’re not paying for it (maintenance fees, anyone?). They won’t be around long to support it if they do.


Do the Unthinkable

In the movie version of negotiation, Party A makes an offer, Party B makes a counter offer (rejecting the first offer). The first set of offers are the extremes, say for example, really low for Party A and really high for Party B. Then, through a series of back and forth discussions, each party slowly moves towards the other in measured, predictable steps. Finally, there’s some huge heroic leap made by one party to accept the other’s “final offer” to successfully conclude the negotiation – both parties smiling as they walk away from the table, arms around each other, glad that they were able to come to terms.

The reality is a little more tricky – and a lot less “clean” in terms of where offers come in relative to what their opponent has proposed. It’s hard work to predict the future, even if you’ve done all of the Information Gathering and Strategic Thinking in the world. And when you have a feeling that you’re really far apart from the start, it can even be worse. So, I’m going to suggest a tactic that you may have considered but never used – one designed to help bridge the initial gap to get both sides thinking about “real” numbers (while I’m a huge fan of negotiating the language of a contract and spend a lot of time doing it, this is really a tactic regarding money).

Let’s set up the problem. First, we have two parties; Buyer and Seller. Buyer wants to potentially purchase a set quantity of licenses. Seller, of course, wants to sell Buyer a much larger quantity of licenses. Thus, there will be two numbers that factor into how much the Buyer pays the Seller: the number of licenses and the cost per license. Buyer believes that they need X quantity of product at Y cost per item. Seller thinks it’s M quantity of product at N cost per item.

To get the negotiation started, Buyer could do one of two things: make an initial offer, or request the Seller to make an initial offer. Most negotiators suggest that you always let the other side go first. In this case, it might be better for the Buyer to go first based on the strategy I’m going to propose. So the Buyer needs to come up with the first offer. Lowballing (or coming up with a ridiculously low offer) isn’t the goal in this strategy. Rather, come up with a “reasonable” offer – one that is based on logic and some consideration to the other party’s beliefs. In our problem, this would mean calculating a dollar value based, perhaps, upon the X quantity but somewhere closer to the N cost. In other words, you already concede a point. (This, by the way, would initial have the appearance of a win-win strategy. In fact, it has the side-effect of testing to see if the other side is going to play that way, too.) So the Buyer’s first offer is $P. (X times N).

$P isn’t a great first offer from the Seller’s perspective. In this particular example, the quantity numbers are where the “real” action is – so the Seller is most likely going to respond with a calculated offer based on the M quantity (regardless of the cost per item). And, in fact, the Seller even thinks that the cost per item is probably too low, too, as it’s based on some discounted amount, not the current retail cost of the item. So from the Seller’s perspective, they have a few choices: 1. They can accept the offer. 2. They can counter with a new calculation by using M times N (their preferred numbers). 3. They can counter some other combination of quantity/cost with numbers between X – M and Y – N.

Or they can try to gain leverage and choose option 4: They can try to highball (take their preferred quantity M times the retail cost). This would create their highest calculable dollar amount and is probably an order of magnitude (add a zero) higher than the M times N number. Remember when I was talking about win-win? If the Seller believes that the Buyer’s first offer was completely unreasonable, there’s a good likelihood that they’re going to respond in kind – and this is the flip-side of that coin. If, however, the Seller believes that the Buyer’s first offer was made in good faith, they’ll mostly likely start with M times N.

So as a negotiator who is properly doing Strategic Thinking, you’re hoping that M times N is the Seller’s highest choice. But what if they come back with M times 10N? How do you respond? You do the unthinkable and LOWER your next offer.

Yeah, you heard me. LOWER it. Your next offer will be X times Y (your preferred numbers from both categories).

But wait! you say. Isn’t that being unethical? uncooperative? unproductive?

No. It’s not any of those things. As I said before, you tried acting in a win-win model. You calculated your price based on part of your preferred position and part of your opponents (based on a reasonable estimation of what that position would be). You presented an offer that, while lower than what the other side would want, was reasonably calculated. But the response you got back was not. Thus, to reset expectations and bust through the unreasonable highball offer, you have to lower your current offer to your best-case position.

The likely result is that the other side will panic. It’s quite rare for a second offer to go DOWN. They’ll accuse you of being uncooperative and unreasonable. They might even say that you’re not operating in good faith (ignore the comment). But a highball offer is a ploy, just as much as your actions are tactics (for a discussion on ploys versus tactics, see The VMO-Blog). You simply need a way to get to the real numbers and doing the unthinkable will help.


CIO Forum this week

This Tuesday through Friday, I’ll be onboard the Norwegian Dawn for the 2008 CIO Forum. I’m participating on a 2-person panel talking about strategies for receiving more value from your IT-related purchases. We’re going to cover the Five Fundamental Skills for Effective Negotiation and you’ll even get a free copy of the Software License Risk Matrix!

If you’re one of the attendees, please look me up… Deck 11, second room from the bow, starboard side – we don’t have to talk about software licensing… I swear.

Additionally, for those people interested in either purchasing a copy of the Software License Risk Matrix or in redeeming my special offer for a FREE copy for those people who own the Software Licensing Handbook… I’m sorry to say that I’ll be slightly delayed in getting your Matrix out to you as I will not have internet access on the ship.  But I will fulfill all orders/redemptions by Saturday at noon (ET)!