The Price of Everything Software

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Sage Software's Ed Kless says his company is actively encouraging resellers to implement value billing. A lot of people think that it's time to toss out billing by the hour-the time and materials approach-in software reselling and go to fixed-fee bids. Larry Schiff thinks it's a very bad idea.

"A friend had a job he didn't want to do so he tossed out a figure of $250,000. He thought that at more than eight grand, the client would run," says Schiff, president of Business Management International, a New York-based reseller of Microsoft Dynamics NAV. "He did more than $900,000 work. They [the client] held him to every inch of it."

Schiff said that fixed fee was popular five years ago, but that talk has died down because so many resellers have had such a bad experience.

Partner Insights

"My personal opinion is that it [fixed fee] shouldn't exist. It creates a lot of problems," says Schiff.

Schiff's opinion is not universal. In fact, pricing technology services is one of those subjects that brings out a wide variety of opinions about what rate-setting system works best

The lack of agreement may stem from one fact pointed out by Peyton Burch, the Houston-based COO of Burch-ERG Consultants

"The reality is that we are at market saturation," says Burch, who sells the Sage Software accounting line. He asks, "Why we continue do our billing on time and materials which is offensive to a customer?"

And it is saturation, Burch says, that is the real problem. In the earlier days of selling financial software, resellers primarily encountered companies that were automating and had no experience with software.

Now, "the market is only switches-you are dealing with people who have gone through the buying cycle at least once," he says. "They are more adept. They are more articulate. They don't want the engagement to go on and on."

Burgum: Customers Like Different Approaches

Does a fixed-fee, hourly rate, or value-bill approach works best for resellers?

That's not the right issue, says Doug Burgum, the senior vice president who heads Microsoft Business Solutions. There is not one approach that fits all customers.

"In terms of pricing, one of the things that we have found is that some people like to buy a product for a couple of hundred bucks and never talk to a VAR," he says. "There are two markets, even for the same size customer. Some of it is preferences as to how they want to purchase."

Burgum's comments strongly echo Sage Software's approach to selling payroll. Sage CEO Ron Verni has described business as having an almost-genetic predisposition to either calculating their own payroll, or outsourcing the service.

That same distinction applies to buying accounting software where Burgum admits, "We haven't been hitting self-service market," he says. Burgum describes the self-service market as the target for the low-cost Microsoft Small Business Accounting package.

Because different parts of the market want to buy different, Microsoft must have more entry points for all kinds of customers, regardless of their preferences.

"We want to be more affordable for people who want help and who want to buy through a partner, channel," he says.

And when resellers simple start with their cost, and then determine a price to cover cost and profit, they cheat themselves.

"If a customer has a $500,000 problem and the software cost $2,000, the value of our solution is $498,000," he says.

Killing Hours

That message is being spread by Sage Software, which has joined the camp of Ron Baker, the CPA who has been the avowed enemy of hourly billing. It has also enlisted Baker to conduct boot camps on another approach-value-billing.

"We have been trying to encourage our partners to move away from hourly billing, not towards a fixed-price method, but to move towards value-based pricing," says Ed Kless, Director, Partner Development and Recruitment, who is spreading the message for Sage Software

Kelss says that value-based pricing is not based on cost, like both the hourly fee and fixed-fee approach. Fixed fees, he note, still rest on the assumption that the business person calculates costs and then determines revenue based on some multiple of the cost that will produce a good return.

In value-based pricing, the cost is based on the value of goods or services to the customers. It's a lot more difficult to establish pricing because the calculation requires study. But Kless uses examples from some successful businesses that he says apply this approach to what they charge.

"Notice that FedEx offers levels of pricing. You have different of choices," says Kless. "It's not cost led. It doesn't cost FedEx any more to ship something in two days than it does in three." The value to the customer is how quickly the package arrives and that is part of the calculation in pricing two-day versus three-day delivery, he continues. In fact, he suggests, the three-day service actual costs FedEx more.

Kless says many successful companies offer three levels of pricing, such as Sears's good, better, best approach.

Software resellers can operate similarly, he continues. That could mean at the lowest level, the client gets installation and training, but no data conversion. At the middle level, the VAR could add conversion of open files, while at the top level, "You are going to get a turnkey kind of thing," he says.

But the value-based approach has its critics, including

Mike Gillis, CEO of Iteration2, an Irvine, Calif.-based reseller of Dynamics AX.

"If you spend so much time administering your billing method, how much value could it have?" he asks.

That's really not an issue, says Linda Kay, vice president of business development for Houston-based Koenig Software Systems, which sells Sage Pro ERP.

"We do a 100-percent moneyback guarantee," she says. Besides, Kay continues, refunding money to an unhappy client is something her firm would do anyway.

"Why wouldn't you do that?" she asks.

Koenig hasn't completely adopted a value-billing approach, buy it is moving in that direction. And despite discussion that it can take a lot of time to establish the value, Kay finds that it doesn't.

"We are finding it not only to be a brilliant idea, but also very workable," she says. "It's not has hard as it sounds."

Kaye's three-person organization starts the client thinking about the cost of doing nothing or the cost of continuing to do things the way it is doing them. She continues that the discussion then moves into scenarios, including discussions about the impact of any saving of time and reduction of costs.

"We work through some of the scenarios. They are the ones that are actually giving us the numbers," she says.

Ready and Willing

Burch's firm is ready for the change and is already moving towards value pricing.

"We have a couple of engagements right now where we are piloting this concept," says Burch.

Iteration2: Competing on the Upper End

When a reseller is playing with large amounts of real money, say in engagements with hundreds of thousands of dollars at stake, being able to quote an estimate takes a lot more work.

"The sales process has a lot of discovery, documentation, and prototyping. We take a lot of the risk out by having a more fully involved sales process," says Mike Gillis, CEO of Iteration2, a Microsoft reseller based in Irvine, Calif.

Iteration2, which has grown rapidly over the last three years, had $23.5 million in revenue in 2005. It got there by serving installations that usually have more than 75 users. Fees for software licenses and enhancements range from $600,000 to $1.2 million, with services at 1.6 times to 2.2 times the software cost. These prices are for companies that don't bat an eye at lots of zeros in quotes.

"We make our living competing with Oracle in the space in which Oracle in starting to push down into the upper mid-market, into places where they could have easy afforded SAP or Oracle," she says.

Iteration2 has done a limited number of fixed-price deals "and they get to be pretty constraining," he says.

Even with the big prices tags, the company's deals are usually based on time and materials. The secret is getting a contract with a firm estimate that is based on that extensive presales homework, along with requiring change orders when project elements exceed the bid.

At this level, Gillis continues, clients understand that they will go live with "pretty good functionality" in phase one of an installation and that there will be a phase

"In that way, we are bound a little bit by perceptions that are out in the market place," he says.

One common change to the initial estimate stems from what clients agree to do.

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