Pity the poor software vendors these days. The economy is in full meltdown, IT budgets and workforces have been slashed, and buyers of ERP, CRM and supply chain management software have become even more demanding regarding their application purchases, especially during 2008.
Of particular financial pain to vendors right now, points out a new study from Accenture: these software deals are “being clinched largely on the strength of off-list discounts of up to 70 percent.” That’s right: seven with a zero followed by percent.
Buyers, of course, are playing only by the unwritten rules of the enterprise software buying game, which have been mostly set and explicitly encouraged by the vendors. In turn, software vendors “are proving to be their own worst enemies,” states the Accenture study.
“It is impossible to overstate how much [software vendors] have trained their customers to buy at the last moment—when products are ‘on sale’ and the sales rep can be counted on to over-discount and is likely to include lots of ‘free’ software and services, such as support and training, to sweeten the deal,” write Accenture’s John Hanson, Sarvajna Kazi and Raymond Florio. “Vendors bring very little discipline to discounting; analyses of transaction data consistently reveal enormous, unmanaged variance in deal economics.”
Accenture identified six forces affecting software vendors that have led to incoherent pricing strategies: industry maturity (slower growth, and increased customer sophistication); competition (from traditional and new players); acquisitions (which disrupt market strategies and offer integration headaches); new business models (SaaS, open source); new markets; and technology factors (such as service-oriented architecture, or SOA).
For their part, buyers have become far more sophisticated—even the “lay” businesspeople working on deals—which places even more pressure on software vendors’ pricing strategies. “Software vendors often don’t know when they are over-discounting or when they are losing sales by keeping prices too high,” notes the study. “Deals are won at lower prices than necessary, and some may not be even worth it.”
“As things stand now,” the study concludes, “both enterprise software vendors and packaged applications are headed for significant problems.”
To me, it sounds like they’re already there.