The Price of Software These Days

Prices always go up, right? Not always. Competition has an impact after all...

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This year, WithumSmith+Brown will spend approximately $300,000 on tax compliance and tax research software. That is comparable to what it spent in 2002, before the accounting firm had grown to more than 300 employees throughout eight offices in New Jersey, Pennsylvania, and New York.

WSB, which is in the first year of its second three-year contract with Thomson's RIA for its GoSystem, negotiated and locked in its price through 2007. David Springsteen, a WSB shareholder, explains that the firm locked in on pricing to offset any increases that could arise as a result of new versions of software needed to adhere to new tax laws.

"We don't want to be held hostage to future price increases," Springsteen says. "And," he adds, "We're getting more value because of the ongoing enhancements."

Partner Insights

During its previous contract with RIA, WSB received enhanced versions of Fast Tax's Data Query and Client Letters. As part of its contract, Springsteen says, WSB is to receive all updates for the software.

Springsteen outlines how the negotiating can go once the base price is established. For example, say the base price is $10 per return for 10,000 returns and 200 users. The firm will counter by saying it would like to pay $10.05 the following year for 11,000 returns and increase its number of users to 250.

"We try to buy today for future growth,'' says Springsteen.

Everyone cares about pricing, and in the tax and accounting market, pricing is a difficult subject to pin down. In the tax market, vendors offer a series of discounts for early renewers. In the mid-market accounting market, pricing is even more complex, varying by the number of users, modules purchased, and types of maintenance and support contracts.

About the only significant trend is that there are no major increases in list prices anywhere in the tax and accounting software market. But there are signs that in the lower end of the tax software market, pricing is becoming an issue, particularly among users who feel that Intuit's ProSeries is overpriced, judging from conversations among practitioners on TaxTalk, TaxAnalyst's email list.

The most notable price movement was TaxWise's 30 percent cut in list price.

The Rome, Ga.-based company dropped the price of its federal 1040 to $695 from $995 for the 2004 product.

Sage Changes MAS 500 Pricing

While Sage says it has not significantly changed pricing for its MAS 500 software, its recent changes to price and functionality illustrate just how changes to module features can increase the cost to the end user.

Nominally, Sage is decreasing the price of the MAS 500 Inventory Management modules for Version 7.0. The list prices changed as follows: Small Business Edition drops to $1,500 from $2,000; Standard Edition to $2,500 from $3,000; and Enterprise to $4,000 from $5,000.

However, the company broke out a separately priced Warehouse Management module for each of the editions. Those prices are $1,500, $2,500, and $4,000 for those editions respectively. A business needing both modules would pay $3,000 for the Small Business Edition and $5,000 for the Standard Edition. Enterprise customers buying both modules would pay $8,000, up from $5,000. Users do get more functionality, including warehouse zones and more advanced picking options for larger warehouses.

Existing IM customers get the warehouse module automatically, but have to pay maintenance based on the price of both modules. After the release of 7.0, the modules must be purchased separately. End users also likely face higher implementation costs, since resellers can now charge for the additional modules.

For several tax software companies, the ProSeries installed base is a major source of their business. Price is one of the lures used by companies such as TaxWise and ATX/Kleinrock.

"Our conversion rate [from Pro Series] is about double last year," says Ken Crutchfield, vice president of marketing for Rockville, Md.-based ATX/Kleinrock. The company's strategy has been to provide bundles of lower-priced products to firms that don't need all the features of a higher-priced offering, such as Intuit's ProSeries or Lacerte.

ATX shows how difficult it is to pin down the pricing picture. More than half of its 55,000 customers receive a 10 percent discount for renewing before June 1. It's easier talking about first-time buyers, but even there the changing components of the company's bundles make year-to-year comparisons difficult. The Total Tax Office for 2005 is priced at $1,400, compared to $500 for the 2004 bundle of the same name. However, the higher-priced offering has unlimited efiling, forms, an integrated W-2/1099 package, and Kleinrock Research. Compare that to $2,140 for the first-year price just for Lacerte's 1040 federal module and $949 for ProSeries, unchanged for the last three tax years.

Intuit acknowledges that low-cost competitors have taken ProSeries customers and that much of the market keys its action to what Intuit does. It's not hard to see why. For the year ended July 31, Intuit had sold 106,000 units of its professional tax packages, up from 97,000 the year before, far more than any competitor.

"Most of our competitors wait until we set our prices and then set theirs," says Lacerte product manager Ryan Farley. The company last year introduced ProSeries Basic, priced at $295. Farley says that the product was not designed to stop desertions, but rather to appeal to a new kind of buyer.

Previously, there was not a lot of price movement in the Intuit tax line.

The price for the federal Lacerte 1040 module is the same as for the 2004 version, which was a 4 percent rise over 2003. On the ProSeries side, customers who renewed by June 30 could lock in a three-year price freeze.

Meanwhile, the price for unlimited efiling with ProSeries was dropped.

"Efiling is growing," says David Kramer, group product manager for ProSeries. "There is more demand for it, so we are trying to help drive the value of it."

The price for unlimited efiling was also dropped for Lacerte.

Efiling is one area were pricing is radically changing as the service is increasingly included in the basic package. ATX added unlimited efiling to all five of its tax packages.

"Efile is where the market is going," says Crutchfield. "We made e-file part of the product line. It's easier for both us and our customers to have a smaller number of comprehensive products."

Market Forces

Of course, there is a big difference in the low-end products. ATX acknowledges, for example, that its tax engine is not as powerful as Lacerte's-yet.

On the higher end of the market, prices are rising modestly. While the price increases vary by product, Mike Sabbatis, vice president of sales and marketing for CCH Tax and Accounting, says that CCH's prices are up by roughly five percent, which, at the very least, covers ongoing investment in the software.

"If someone is not raising their prices," Sabbatis says, "then you've got to question whether they are investing in their software."

Similarly, Creative Solutions typically has annual increases that it tries to keep in line with the rise in the cost of living.

"We are like any business," says Jack LaRue, vice president of marketing for the Dexter, Mich.-based company. "Price increases are a cost of doing business."

CSI's increases have ranged from 1 percent to 3.5 percent over the last few years. For example, the first-year price of the federal 1040 module was priced at $1,975 for the 2004 tax software and $2,000 for 2005. Prices for modules changed at different rates. LaRue says that the average user will pay 3.5 percent more for 2005 software.

One trend among software vendors is the tendency to add functions without changing price. That's usually discussed as an improvement in price performance.

Mid-market moves

Pricing for mid-market accounting software is a different story. There is not much evidence of vendor price discounting, despite having the market undergo a consolidation similar to that experienced in the tax software market.

Vendors argue that what has happened is improved price performance.

"Microsoft's business applications pricing has not increased over the past four years, even though Microsoft Business Solutions has significantly enhanced its solutions through major releases every 12 to 24 months," says Lynn Stockstad, general manager for MBS Dynamics GP (formerly Great Plains) and Dynamics SL (formerly Solomon). She continues that, "The result is lower overall investment for the customer."

Another issue is that license fees are only part of the end-user cost. Most vendors have an annual maintenance fee. Generally set at a percentage of the software license fee, maintenance is usually mandatory for the first year. Maintenance and support is big money. Sage reported that 50 percent of its $1 billion in income for the year ended Sept. 30, 2004, came from support revenue.

One of the most significant price changes came two years ago when Microsoft required Navision users to follow the maintenance schedule that Great Plains and Solomon users paid. The result boosted maintenance costs by 60 percent. But that was a one-time event.

Tax & Accounting Software Vendors

ATX

Caribou, Maine

(800) 944-8883

www.atxinc.com

CCH Tax & Accounting

Torrance, Calif.

(800) 739-9998

www.prosystemfx.com

Creative Solutions

Dexter, Mich.

(800) 968-8900

www.creativesolutions.thomson.com

Drake Software

Franklin, N.C.

(800) 890-9500

www.drake.software.com

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