Revenue from maintenance and support plans is growing more important.
Like what you see? Click here to sign up for Accounting Today's daily newsletter to get the latest news and behind the scenes commentary you won't find anywhere else.
By Robert W. Scott
Anyone who has purchased an appliance at Sears knows that they have entered a long-term relationship. With regularity, telephone solicitors attempt to woo the consumer into purchasing a maintenance contract, if one was not purchased during the original sale, or into extending an existing contract.
And why not? Unless the user calls Sears to get a repair for a broken dehumidifier, or accepted the standing offer of an annual inspection on an air conditioner, the company gets a pretty high-margin source of income. Since companies use accounting software as long as many consumers use washing machines--and the contracts are for much higher prices--maintenance and support revenue is critical to both software vendors and their resellers.
"If the software is going to be with a client for ten years, it's a cash cow," says Murray Aston, president of Softline North America, a company that is now part of the Best Software family that sells AccountMate and BusinessVision Software.
As the market for accounting software grows more saturated and there are fewer new users, selling services, including maintenance and support, to existing customers gets more attention from both resellers and vendors.
Generally, before the year 2000, new license fees represented a majority of the revenue received by accounting software vendors. Great Plains, while it was still independent, consistently registered new license sales that were about 57 percent of revenue through the 1990s. In 1998, license fees represented 58 percent of revenue at Epicor. That was typical for the period.
But as more users purchase software, which they replace every seven years on the average, those numbers dropped. For companies that made money, maintenance was increasingly more important. For companies that were struggling, maintenance revenue helped keep the boat afloat. For example, Epicor's revenue dropped by 10.9 percent, but its maintenance rose to $75.5 million for the year ended December 31, up slightly from $74.2 million in fiscal 2001.
"Maintenance is one of the most important aspects of revenue of accounting software," notes Aston. One of the major improvements Aston believes he has made since Softline's purchase of BusinessVision and AccountMate is to increase the amount that both the company and resellers receive from such contracts. He continues, "We've been driving that figure up year after year."
Most companies peg contracts at a percentage of the initial software license. Fees in the 15 to 18 percent range are typical. But things are a lot more complicated than that.
NetSuite: What Maintenance?|
While vendors with CD-based software continue to fine-tune their support and maintenance plans, NetSuite says that online accounting makes the whole question superfluous when it comes to its product.
"Maintenance is built into our per-user licensing cost," says Zach Nelson, president of the San Mateo, Calif.-based company. And the reseller gets 30 percent of the customer fees, as long as the user remains a NetSuite user.
Nelson says that means the cost of ownership of his company's system is not going to rise, the way he predicts such costs with continue to rise for disk-based systems.
"Customers are revolting against these huge charges," he says. Maintenance fees "might be lucrative at the end of the day. But the customers hate it. I think they view it as a hidden charge." To pay a 16 percent maintenance fee when software is initially purchased means that customers are being asked to "pay for the next release before you install the first release. I've always been shocked at that."
Nelson attributes NetSuite's ability to roughly double its run rate over the last year to its licensing model. A year ago, NetSuite had about $20 million in income. It now is on a $40 million run rate.
Softline, like MBS, finds itself often selling the contracts for the resellers, who receive a commission no matter who sells the services.
"We find the resellers are not very good at selling contracts. We end up selling it for them," says Aston.
How do you measure success? David Dierke, executive vice president for AccountMate, says that AccountMate went from a 33 percent renewal for end users renewing after the first year, to more than 50 percent since he joined the company. Both Dierke and Aston say the key to renewals is producing consistently good software.
"If you don't have consistent builds," says Dierke, "the end user and business partner loses track of its (maintenance's) importance. The end user refuses to buy it because they don't see the value." Ironically, once end users have greater confidence in product quality, they are more willing to sign up for both maintenance and support, and are far less likely to use support.
AccountMate has worked to increase the number of customers buying its contracts and the amount they pay. The company charges 15 percent of the retail value for its Support Plus contract for Version 6.0 of its SQL Server product and 25 percent for its newer Lifecycle maintenance. Among its other features, LifeCycle gives end users access to support personnel dedicated to their account.
Aston predicts that maintenance will continue to get more expensive as software becomes more complicated, the market nears saturation, and users grapple with the needs to manage cash in purchasing technology.
"The business has become a maintenance and subscription business," he says. "I think the whole future is subscription."
A 60 Percent Hike
One of the biggest changes in maintenance plans in 2003 came when Microsoft moved its U.S. Navision users from its 10 percent fee to 16 percent, the same level as Great Plains and Solomon.
The Maintenance Biz/A Primer|
Maintenance and support programs, while different, are related concepts and priced similarly in that both are usually priced as a percentage of the initial software license fees.
The difference in terms can be confusing when talking about maintenance contracts. Maintenance includes the contractual ability to upgrade to new versions of software without paying the price offered to new users, along with updates, fixes, and often information about bugs and patches. Support encompasses trouble-shooting and solving issue for customers who experience a problem with their software packages. Most support is delivered via telephone.
Some companies combine maintenance and support under the same contract. Others sell them separately.
Fortunately, getting current, for customers who want to jump on to a maintenance contract after having one lapse, is not as important for products that are used largely out of the box, like Great Plains, says Larry Schiff, president of Business Management International, a New York City-based Navision reseller.
Schiff's company sells telephone support for 10 percent of the software invoice price, along with the 16 percent maintenance fee (the enhancement plan). Resellers, depending on their revenue volume with MBS, get 18 to 22 percent of the 16 percent charge by Microsoft. If a customer buys $100,000 worth of Navision software, the client pays $16,000 annually for the support, with the reseller getting $1,800 to $2,000 from that amount.
Maintenance, notes Schiff, is a lot better source of income than support. "Anybody is a liar if they tell you they make a lot of money on services," notes Schiff. "Maintenance is the one clear-cut way that you can produce revenue."
Resellers can invoice customers for maintenance. However, Schiff notes, if a reseller does not get more than 50 percent of clients under contract, MBS takes over the invoicing.
What's the secret to selling contracts? "It's just automatically invoiced," notes Schiff. "The assumption is that the customer will renew."
Microsoft Business Solutions is fine-tuning its program, and dealing with terms that the company concedes are clear enough to the market, including one maintenance program, called Software Assurance. It also has to work with the integration of the Navision/Axapta plans. The Navision plan "was under priced," says Jana Reinke, service marketing manager for MBS. Navision users were given essentially the same terms as the Standard A plan from Great Plains.