SAP and Oracle Explore Customer (In)elasticity of Demand

Recently, both SAP and Oracle announced significant (20%) price increases in their offerings: SAP on maintenance fees, and Oracle on license fees. The numbers are significant: Oracle now charges $47,500 per processor for a database license. These increases fly in the face of what is happening to pricing in other digital goods, viz music, telephone calls, etc. In those markets, digitization and digital distribution have caused end user prices to plummet, to the point of industry disruption and a dramatic change in how the goods are paid for -- some companies now allow you to pay with your time, in the form of listening or watching advertising, instead of your money.

So the general trend is that digital goods, in this Internet age, are getting vastly cheaper. Yet SAP and Oracle sail into the wind of digital disruption and blithely raise their prices.

Why are they immune to digital price deflation?

In a word, you.

These companies have you over a barrel, or as industry pundits put it, you are suffering vendor lock-in. Having selected one of them a number of years ago and undergone a long, expensive, and frustrating implementation, you are extremely unwilling to change anything, now that you've finally got it working right. And so, since you are unable to do anything about whatever the vendor does, you suffer their very rational response to that situation. Oh, you might complain about it, and commiserate with your fellow attendees at the next vendor conference, but you'll just send the invoice over to AP, and find somewhere else in your budget to trim so that you can cover the price increases. An economist would say you have very low elasticity of demand, meaning you do not respond to changed prices. If I were in that situation, I'd do the same as Oracle and SAP: treat you as a rich resource to be plundered.

Nevertheless, there is danger here for both the vendors and for you.

For the vendors, they appear to have determined that exploring price elasticity is unwelcome, which is to say, they're not convinced that lowering their prices would bring them significantly more business. As Thomas Wailgum of CIO put in a recent post, one of the complaints customers have about these products is the huge implementation costs of putting them in. Said a different way, they're so complex that very few companies can afford to take on the cost of getting them installed and working. Consequently, reducing prices on the software probably wouldn't grow the customer base, because most companies can't afford the total cost of owning them.

That doesn't mean that other companies don't need this kind of functionality, just that they need it in a cheaper and more easily consumable form, e.g., SaaS. Both Oracle and SAP pay lip service to SaaS, but their actions belie their words. They recognize SaaS for what it is: a dagger pointed straight at the heart of how they do business.

Since they're not going to grow their user base, what other strategies are there to increase revenues? Well, buying other companies that have similar business offerings comes to mind. Both SAP and Oracle, particularly the latter, have pursued this and thereby increased revenues . There aren't that many big companies left to buy, though, so what's a growth-oriented company to do? Well, increase prices. They've both just done that, and this won't be the last time, so get used to it. It's going to be like the cable company -- yearly increases above the rate of inflation.

The problem for Oracle and SAP is that, having done the two obvious things to demonstrate revenue growth, there aren't any other tricks left in the bag. There are only so many Fortune 2000 companies to sell eyewateringly expensive software to (around 2000, by my calculation). Consequently, from a vendor perspective, these companies have painted themselves into a corner. They've created products that appeal to a tiny percentage of the market and face the prospect of limited growth. That's dangerous if your stock price is based on being perceived as a growth stock and your business depends on that.

But so what? Vendors can take care of themselves. This situation is a danger to you, too, and that's something you should be concerned about.

Why does it threaten you?

Think of it this way. While you've tied your career and performance measurement to this unbelievably complex arrangement, a revolution is going on in IT. I don't just mean SaaS. I mean that computing is oozing into every business offering your company delivers. Meanwhile, you're stuck devoting an ever-increasing part of your budget to this legacy arrangement, forcing innovative offerings to subsist on the marginal crumbs of leftover budgets.

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