FOCUS: Enterprise resource planning (ERP) software

There are a number of factors that influence the final price tag of an ERP system, and the end result can be highly variable.
Infographic showing what the main determinants of price include (courtesy of Software Advice).
Infographic showing what the main determinants of price include (courtesy of Software Advice).

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by Forrest Burnson, market research associate, Software Advice

The major enterprise resource planning (ERP) vendors are notoriously cagey about the cost of their software – and if you’re reading this, chances are you know this software isn’t cheap.

There are a number of factors that influence the final price tag of an ERP system, and the end result can be highly variable.

Typically, when a buyer has selected an ERP vendor, both parties will negotiate the terms and enter into a contract. This can be a long, drawn out affair depending on the size of the company purchasing the software and their requirements.

However, the total price for is generally influenced by several major factors: number of users, applications required, customisation level and where it's hosted. 

The number of users and applications required generally correlate with the size of your business; larger businesses typically have more users who need to access the system, and require more applications and greater functionality.

Higher numbers of users and greater functional breadth and depth, in turn, will contribute to a higher-priced system.

Customisations can add up, too, especially if you’re in a niche industry with specialised business processes. For example, some firms that do custom manufacturing might require additional modules and features to allow for more flexibility with their production planning and supply chain management applications.

One major question for businesses seeking new ERP software is whether to deploy an on-premise or a cloud-based system.

Each type of deployment has its own unique pricing structure: Generally, cloud-based systems are paid for on a subscription basis (often billed per-user, per-month), while on-premise systems are sold under a perpetual license (with one upfront fee).

Typically, subscription fees for a cloud system, over the course of a year, will add up to about 20 to 30 percent of the cost of a similar system's perpetual license.

Depending on the vendor, maintenance and support may be included, or may cost extra. With an on-premise deployment, users must still pay annual support and maintenance costs that run between 10% and 20% of the original licensing fee.

As such, the choice boils down to a high, upfront cost and lower recurring costs with an on-premise system, or a lower upfront cost with higher recurring costs when choosing a cloud-based system. Over time, these costs tend to converge.

As cloud systems offered on a subscription license are considered an ongoing operating expenditure, software vendors tend to price them competitively against on-premise options.

For smaller businesses, cloud offerings can be much more attractive due to the lower initial price point. Larger businesses, however, tend to be less reticent about making a significant capital expenditure on an on-premise system.

To give provide an idea of what the expected spend on ERP systems is, Software Advice analysed the estimated budgets of 200 small to midsize companies that contacted the company in 2014 in search of a new ERP system. To view this data, click here.

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