Friday, January 21, 2005

Software Licensing and Pricing: Focus Efforts on Maintenance First

Maintenance costs are the most expensive over the long term
Focus negotiations on total cost not just license costs. Many enterprises enter into software contracts focused on license cost. However, the key driver of costs is really maintenance. At 17 to 25% of the license cost, enterprises end up buying up to 2x the original cost of software in a 10 year period. Let's take a look at what this means:

Number of licenses: 1000
Average cost: $2000/named user
Maintenance %: 20%

10 year license cost: $2M (assuming upgrades are free)
10 year maintenance: $4M (assuming no maintenance fee increases in between)

As you can see, the focus on negotiations should be on the maintenance fee increases as well as the maintenance fee percentage.

Quick advice:
1. Focus on negotiating a lower maintenance percentage
2. Use net price not list price as the starting point
3. Cap maintenance fee increases for the life of the relationship to x% or CPI whichever is lower
4. Agree upfront on how upgrades and additional modules will be priced into maintenance contracts

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2005 by R Wang. All rights reserved

1 comment:

jay paul said...

Really nice post, you got great blog and Thank you for sharing This excellently written content. Waiting for next one.

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