The Price of Software Happiness

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Software pricing has always reminded me of a black hole, which is hard to see mostly because its gravitational field is so strong that no light can ever escape. Direct observation of a black hole is impossible, and astronomers are left to speculate as to their shape and function based on assorted secondary signals and information.

Enterprise software buyers also operate in the dark when it comes to software pricing. Many companies’ pricing structures are so complex and arcane that their own sales people have trouble grasping them, and most buyers admit to being bewildered when trying to decipher the different schemas (and schemes) by which software costs are divulged to prospective customers.

Oracle’s recent announcement regarding its 11i applications suite pricing is the latest attempt at providing some transparency to this overly complex part of the technology acquisition process, and a welcome one at that. I say overly complex because, ironically, the amount of attention paid to the price of software is generally fair in excess of its real value in closing a deal.

This overemphasis on price goes on despite the fact that software is still far from the largest cost in technology acquisition. Depending on the product and project, systems integration, business process re-engineering, and, yes, even training, can significantly exceed the actual license cost.

Perhaps more important is the role price plays in the deal-making process. Few, if any, enterprise software deals are won by the company with the lowest price. In fact, there are many more deals in which the lowest-cost product didn’t make the final cut. Of course, price matters, but other issues, such as functionality, technical expertise, understanding of a particular vertical market requirement, or even simple compliance with the terms of an RFQ are usually more important factors in determining who wins and who loses.

Baring Its Pricing Soul

But don’t think of Oracle’s pricing announcement as much ado about nothing. Its announcement last month that it would standardize on a suite price of $4,000 for an enterprise user and $400 for a self-service user was the company’s latest attempt to do two important things for the industry.

The first is offer transparency and a degree of comparability to the software pricing process. As a customer, you now have a benchmark for comparing Oracle to its biggest competitor, SAP (answer: the two companies’ prices are now largely similar). And it gives you some ammunition to use against the sales rep who hides behind value pricing and other smokescreens.

While this isn’t the only metric you should use for comparative shopping (remember, these prices only work if you buy the entire suite), it’s a nice way to get past the pricing issue. Which is really what Oracle is saying by making these numbers public.

The second and more important take-away is that pricing isn’t really the secret sauce for any vendor’s offering. It’s just a component of the total equation, less valuable than any individual feature and much less strategic than issues like how well the vendor supports industry-specific functionality or standards. By baring its soul, Oracle is pushing the industry to move on to the real issues.

Of course, there’s some risk for Oracle in publicizing what others strive to keep private. It makes it easy for competitors to come out of the block by stating that Oracle is overpriced — though in reality that probably won’t happen. PeopleSoft is a value-pricing company, so it can’t really knock Oracle’s straight shooting.

J.D. Edwards also will have trouble using price as a weapon: chairman Ed McVaney complained during the company’s Q4 financial call last December that its competitors (Oracle included) were very competitive in pricing. Meaning, according to McVaney, Oracle was underpricing itself compared to JDE. Hard to come out now and claim that Oracle is actually overpriced. And SAP? Well, if Oracle is overpriced, then so is SAP.

So by exposing pricing, Oracle is effectively taking it off the table. That’s fine with me. Average deal size has always been a better metric of software cost, and one that companies generally make public and can be held accountable for. I’d rather worry about the absolute value of the software than its virtual cost. So should you.