Oracle Announces New Suite Pricing
Oracle tinkers with its price structure,
making off-the-shelf buying slightly easier.
Bottom Line
Oracle has announced a restructuring of its e-business suite pricing,
making it slightly easier for small companies to buy the suite.
The move signals no change in Oracle fundamentals; it is purely
tactical, removing an irritant for some customers that was probably
not anticipated when the original suite was announced.
The Background: Package Bundling at Oracle
The new E-Business Suite 2003 Pricing is different from
the old pricing in three ways:
- The minimum number of users is reduced by 10 percentage points
to 10% of the workforce. (Or at least
that's what I think Oracle's cryptic wording means.)
- The $250,000 threshold for the suite is eliminated.
- The number of components included in the suite has been reduced.
The effect will be to simplify pricing and (probably)
lower prices very slightly for certain small and medium-sized businesses
that want to buy at a single, simple, bundled price.
To understand why this will be the effect, you need to go back a ways.
Two years ago or so, Oracle decided to publish its prices on the web and
allow people to buy software off the shelf. They established a
separate per-seat and minimum-seat pricing scheme for each of
its 40-odd application modules.
Large customers who were buying lots of modules, however,
thought that this was too complicated. If they were buying
all or most of the modules anyway, they just wanted to count the
users and figure out the cost from that. Oracle therefore developed
a bundled pricing option called e-business suite pricing.
You got all the modules and a single price per Professional User seat.
This made things easier for people who were budgeting purchases of
new seats or new modules and so gave some predictability to the price.
The idea was (and should be) that the amount of money
paid under the e-business suite pricing and the amount
of money paid if you bought each component separately would be roughly equivalent.
If the two models weren't equivalent, customers would waste a
lot of time trying to switch between models in order to get a
slight price break, and the gain in simplicity would be lost.
Yes, the e-business suite would have some form of volume discount built in,
but there were also volume discounts built into the component prices.
Unfortunately, the original bundled pricing model
had what appear to be minor flaws. Foremost among them is that some
self-service suites (like HR) had a large number of users who
were not Professional Users. To use those suites, you'd end up having to
pay for more Professional Users under the e-business suite pricing
than you wanted to. There was also a $250,000 minimum,
which apparently seemed daunting to some potential buyers.
The changes are an attempt to fix those flaws. By paring down
the e-business suite so it only includes core modules and by
allowing people to add on the self-service suites using component
(per actual user) pricing, they eliminated the requirement to
buy more Professional User seats than were needed.
By eliminating the $250,000 minimum, they eliminated a
real or perceived barrier. C'est tout.
A Minor Effect
In the announcement, Oracle presented
two examples where a company would be able to
buy the e-business suite with a significantly smaller cash outlay under the new plan.
On the call, several analysts apparently concluded
from these examples that prices are going down significantly.
I don't think so.
The large price drops in both examples appear only
because the examples are not terribly realistic.
(They are good examples in that they illustrate the point,
but they aren't like anything that an actual company would do.)
To check this, I put on my CIO hat and pretended I
worked for each of the example companies. I went to the
Oracle store and bought the modules they mentioned using component pricing.
In both cases, the total price at the Oracle store was significantly less
than the new, "lower" total price with E-business Suite 2003 Pricing.
I think this is generally true. In most cases where the new pricing would
theoretically produce a significant price drop, component pricing
would be a still superior option with even lower prices.
In fact, certain kinds of buyers might actually find
that the new pricing is more expensive than the old pricing.
Because so many "small" components have been dropped from the e-business suite,
a company that wanted a lot of those components
might end up paying slightly more. Again, it's easy to construct
examples where this might be true, but most are quite unrealistic.
Even if the price were greater, though, I think a lot of
customers who want a bundled price will prefer the smaller bundle
because they want control over the timing and total cost of their
purchase of add-on modules. So if you do start thinking of this as
a price increase, don't then think that Oracle is discouraging customers.
Pricing Trends
Many canny observers think that these academic discussions
of pricing policies are completely ludicrous. They believe that
the only pricing policy actually operative anywhere in the industry
is what I have long called wallet pricing. You look at the size of the
wallet and that's the price. Whatever Oracle's pricing model, they say,
the actual prices are much, much lower in these parlous economic times.
I am not in a position to say whether these observers are right
or whether the frequent reports of heavy discounting by Oracle or
other vendors are true. It is Oracle's stated position that they do not
discount applications from the published price. I will say, though, that
there are loopholes in that position large enough to fly a 747 through,
and heavy discounting in tough times wouldn't be a surprise in this industry.
If you do care about pricing models, however,
there are a few things left to note about this move.
Most important, Oracle is falling in line behind
PeopleSoft in establishing a structure that allows
them to develop and sell small modules at prices that are
low enough to feel reasonable to the buyer but high enough to
make a difference at quarter-end. Oracle now has a simple base price
and add-on prices for new, small modules, which is a prerequisite.
SAP, so far as I know, has still not really figured out how to do this.
Also worthy of remark is the fact that open, published pricing
hasn't really caught on in the industry. Nobody else has a store
where you can buy modules off the shelf, and nobody seems to be
thinking of putting one in. And Oracle doesn't seem to have reaped
the benefits from this that they might have hoped. I have literally
never heard anyone say, "Well, at least from Oracle, you know what
you get and you know how much it costs."
But, finally, I will say that their pricing policies and
strategy have made me feel better about them. When I first encountered
Oracle, its behavior in sales situations made the word "egregious"
seem like a compliment. This new openness and clarity, at least in pricing,
is such a departure from the way things used to be that it has made me
think that maybe things have really changed there.
See, even the old curmudgeon can have fits of optimism.
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