Tuesday’s Tip: Software Licensing and Pricing – Q4 Bodes Well For Discounts

Published on October 13, 2008 by R "Ray" Wang

In both the enterprise and SMB space, recent market conditions point to a lack of available financing for enterprise software purchases.  This trend will continue as the credit markets tighten.  The result – vendors will be more inclined to discount.  Enterprises engaged in contact negotiation with software vendors should take this opportunity to seek additional discounts as the scarcity of new deals will put customers in the driver seat.  Keep in mind a few tips:

  • Push for deeper discounting. Now’s the time to buy more licenses should you need them and if you have the cash to spare.  Vendors remain anxious for new deals and new deals are far and few between.  Apply lessons learned from the last economic downturn.  Discounting will include non license areas such as implementation, training, and support.  Push for maintenance fee decreases where possible.
  • Don’t hesitate to wait till January 2009. Customers are now in the driver seat.  Taking the time to push purchases off till January 2009 buys time for the implementation markets to slow down and provide enterprises with the best deal.
  • Expect vendors to raise revenue recognition rules as a barrier. Vendors often use revenue recognition issues raised by AICPA Statement of Position (SOP) 97-2 as an excuse to limit certain levels of discounting.  In many cases, vendors may be bound on how the recognize the licensing, selling, leasing, and/or marketing of that software.  Vendor specific objective evidence known as VSOE requires a company to demonstrate fair value, especially when deliverables like license, support, upgrades, and maintenance are bundled.  One approach – have the vendor demonstrate the range of discounts as they apply to their VSOE rules.  Often times, the sales person is confused about how these rev recognition rules impact the deal and will “hide” behind these rulings.  Breaking down the revenue recognition components often identifies hidden opportunities.  Keep in mind there are some limits.
  • Understand how non-monetary concessions have value. Once you reach the point of a price floor, consider asking for the right level of product development and executive sponsors.  Other options include more favorable changes in software licensing clauses such as a set rate of maintenance for the life of the contract.  Consider being a reference account should the vendor agree on functionality enhancement delivery deadlines or SLA’s during implementation or upgrade.  Opportunities to establish industry standards with peers may also prove beneficial.
  • Seek escrow accounts for vendors that may pose financial viability issues.  One way to protect your software investment is to seek a deposit of the software source code into a third party escrow account.  This is one way to ensure the maintenance of software, and if the vendor goes bankrupt or fails to maintain and update the software as promised, you own the code.  You can also set up other conditions like change of control or certain thresholds of financial performance.

The bottom line.

The next 6 to 12 months will provide a unique opportunity to negotiate for new deals.  Expect continued discounts until the credit markets stabilize.  Keep in mind that the above advice should be approved by and in partnership with your own legal counsel and vendor management professionals.

Your POV.

I’m curious as to how you did on your last deal.  Share with me your story and concession by posting here or sending me a private email to rwang0@gmail.com.  If I use it in my next research report, I will send you a copy of one of our Long Term Packaged Apps Strategy reports.  Look forward to hearing your thoughts!

Copyright © 2008 R Wang. All rights reserved.

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