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Putting a Price Tag on Midmarket CRM Deployment
Comparison-shopping for a midmarket CRM solution can be perplexing when each vendor uses a different pricing model to figure its fees.
Posted Jun 5, 2001
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How much would you pay to give just one of your employees access to your customer relationship management system? $65? $595? $995? Or even $600,000?

It may seem surprising, but depending on which software or service provider you choose, you could end up paying any one of those four prices. The bottom figure, $65, is the individual user fee charged by hosted service provider Salesforce.com. The two middle figures represent standard "per seat" license fees offered by midmarket application vendor Interact Commerce. The prohibitively high top figure, which stems from anomalies in the pricing structure of a major enterprise software supplier, is the fee its customers could theoretically end up paying when they bring their 201st user online.

The wide range of charges levied in the midmarket is characteristic of the problems users face when calculating their CRM investment. Vendors offer a variety of pricing models, some based on the level of functionality deployed, others on the number of users, or sometimes on both. Payment terms vary as suppliers respond to the downturn by offering heavy discounts and flexible schemes.

Meanwhile, application service providers (ASPs) offer an entirely different route to rollout in the form of monthly software and service rental fees. Add to that the huge variation in implementation costs, post-rollout services and training, and it's easy to see why ROI calculations give users such a headache.

Many of the problems stem from the diverse business drivers that characterize the midmarket. For one thing, the midmarket itself is made up of numerous sectors, and the requirements of organizations turning over $150,000 differ greatly from those with revenues of $500,000 and more. That makes life complex for vendors.

For another, many enterprises start their CRM initiative by implementing a sales force automation (SFA) solution to alleviate the major pain points within their organization. As a result, vendors selling a full-blown CRM suite, incorporating marketing and service functionality as well as sales, find themselves having to compete against SFA "point" specialists whose pricing is generally lower. For companies like Siebel Systems that are accustomed to handling large enterprise-wide rollouts, that requires a very flexible approach to market.

And unlike the enterprise space, where organizations have the financial and human resource required to manage major IT rollouts, midmarket companies tend to be constrained by budget, time and skill limitations. Users expect vendors to deliver rich functionality, then customize and install the software as quickly as possible--all at a reasonable price. Not surprisingly, some suppliers struggle to deliver.

To tackle these issues, several vendors have introduced step-pricing based on the level of functionality users require. Onyx Software, one of the leading midmarket players, offers two levels of licensing through its direct sales operation and three tiers through its ASP service, ranging from core SFA components to the full-blown suite. Similarly, Interact Commerce, whose roots are in SFA, offers a pared-down version of its application for lower-level users. In most cases, vendors also charge by the number of users, levying a fee for the initial server license and additional charges as more user "seats" are added.

Generally, that banding structure works, but in extreme cases it can cause bizarre results. European experts analyzing one enterprise vendor's pricing structure noted reasonable increases in price bands up to 200 seats, the limit for the scaled down version of its software for the midmarket. At 201 seats, however, the user was theoretically obliged to upgrade to the full-blown enterprise edition, a leap in pricing of some UKĀ£400,000 (US $565,000). The logic behind the price hike appeared to be that if you wanted enterprise-wide capability, you have to pay for it. But for companies considering a gradual CRM expansion program, it was clearly unsustainable.

Opinion is divided on the merits of these kinds of delivery models. Rod Johnson, director at AMR Research, is critical of higher-end vendors who try to break into the midmarket by stripping out functionality from their applications to justify cutting the cost. For one thing, although businesses are far smaller than in the enterprise space, they can be just as complex and may require deep functionality. For another, he argues that midmarket vendors only have one shot at implementing CRM--they get the system in, and then the employees involved on the project return to their normal jobs. The "Big Bang" approach to implementation, which analysts advise against in the enterprise space, is the best route forward for the midmarket, rather than buying into a trimmed-down version with a view to upgrading later.

Others disagree. Neil Robertson, CEO of European Onyx reseller 30/30 Vision, argues that CRM is "a journey, not a destination"--quick wins, he says, are vital to keep users enthusiastic about the process, and users should focus on making a series of step improvements rather than tackling a company-wide project in one go.

Whichever route they take, however, the implementation element is going to be critical. As Robertson points out, users are often confronted with two conflicting dynamics in a CRM rollout: the requirements of the license provider, which wants to offer a competitively-priced application, and those of its implementation partner, whose fees are ultimately linked to its ability to extend the scope of the project.

That kind of conflict has long been apparent in the enterprise space, where historically the cost of implementation and training services has been as much as four to five times the cost of the software license. These days in the cash-conscious midmarket, most vendors prefer to talk about 1:1 ratios. In the end, the cost is primarily a factor of the degree of customization required and the ratios can vary widely.

Russ Lombardo, director of North American Field Sales at FrontRange, points out that its software can be installed out-of-the-box as fast as that of any rivals. Many of its users, however, prefer to work with resellers to customize the application and deal with related business process issues, at which point the service element of the ratio climbs to perhaps 3:1 or 4:1 or even higher. In these instances, FrontRange, like others, encourages its resellers to strike fixed-price contracts up front so that costs do not spiral out of control. Increasingly, as users look to integrate their CRM systems with their back-office applications, managing these costs will become a major focal point.

All of these issues fuel the case for ASPs like Salesforce.com, which offers to take away the pain of implementation by providing browser-based access to systems that it hosts. CEO John Dillon argues that the price of a typical CRM software license can ultimately amount to just 10 percent of the total cost of ownership, once all the related services and support are taken into account. At $65 per user per month for the Salesforce.com service--"the cost of getting a latte every day"--the hosted service has its attractions.

In the long run, license providers are likely to respond to these services by offering a broader range of pricing options. Many vendors are already turning to alternative financing arrangements. Over the last six months, for example, FrontRange, has seen a big increase in third party leasing opportunities, covering not just hardware and software but more unusually, services too. Over time, "pay-as-you-go" and other flexible payment options will become more prevalent. The net result will be greater choice--but whether that makes the selection process any easier remains to be seen.

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