How important is CRM software pricing?

SaaS has simplified the way vendors price their software. How much do buyers care, and could it lead to a price war in the market?

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Earlier this month, Microsoft announced its plans to release its CRM Online product at an introductory price of just $31 per user per month. It was just the latest in a number of promotions for Software as a Service (SaaS)-based CRM products that have focused on price.

But given all the factors in a CRM software purchase, ranging from flexibility to scalability to fit for a specific industry, how much do organizations really care about the price point?

"They care a lot," said Bill Band, analyst with Cambridge, Mass.-based Forrester Research.

Price matters more for IT than the business. The business will spend more if they think 'we can get people to use it.'

Eric Pozil, managing director of CRM Northwest, a Seattle-based consultancy

According to Band, the emergence of SaaS CRM has made the application purchasing process far more transparent and, as the major CRM vendors reach functional parity, price has indeed become a more important factor in CRM software selection.

"It was the No. 1 factor for us," said Brian O'Neill, chief technical architect at TGT Solutions, a Bradford, Ontario-based system integrator that runs Microsoft Dynamics CRM internally.

TGT Solutions adopted Microsoft three years ago, and the company has experience with Siebel and Salesforce.com deployments as well. O'Neill's been happy with the decision so far.

But not everyone makes their CRM decision on pricing, and for others it's certainly not the top consideration.

Earlier this year, OraMetrix, a Richardson, Texas-based orthodontic technology company bought Salesforce.com licenses for its sales force and Marketo licenses for its marketing automation needs, when it could have had Microsoft CRM essentially for free, said Dan De Silva, vice president of marketing for the company. The company had considered Microsoft, Oracle and Salesforce.com for its CRM needs.

"With Microsoft, we were a little more in the air because we were a Microsoft partner and it would have been advantageous to us because we can essentially set up a Dynamics server here free," De Silva said. "Pricing wasn't the deciding factor. Really, ease of use and ease of adoption."

OraMetrix develops its orthodontic applications for Microsoft environments, making it a Microsoft partner. But as a service-based business with lots of people touching the CRM system, speedy end user-adoption was a critical factor as was the system’s ability to adapt to OraMetrix's business terminology and processes.

"For all those reasons, cost took a backseat," De Silva said. "Ultimately, there was some flexibility on the vendor's part that made it less of an issue. Having said that, we know we paid more than we could have but we feel confident we made the right choice."

Not all CRM price lists are what they seem

Indeed, while pricing has become a bigger consideration, list prices are just that -- list prices, advised Forrester's Band.

"Pricing in software doesn't mean a whole lot," he said. "Discounts of 50, 60, 70 percent are very common."

That's just the case with one recent Salesforce.com customer.

"List price has an effect on the decision more during early phases of consideration than later, when only dealing with a small handful of final vendors," John Bivona, customer relations manager for Nikon Instruments, wrote in an email. "By that point, the negotiated pricing became more important."

Eric Pozil, managing director of CRM Northwest, a Seattle-based consultancy, said among clients he's dealt with the importance of price is dependent on the size of the company and who's doing the purchasing.

"If it's IT, they go after the platform. Business is more focused on usability or their own personal experience with the CRM tool," he said. "Price matters more for IT than the business. The business will spend more if they think, 'we can get people to use it.' For the large enterprise, price doesn't matter that much because they feel they can negotiate with any vendor."

WSI, a Toronto-based digital marketing company, selected NetSuite CRM three years ago because it no longer made sense to develop and maintain its own CRM system.

"Our internal system had gotten to the point where ongoing maintenance and monitoring wasn't as cost-effective as something already out there," said Nick Lattanzio, director of sales and marketing. "We were looking to save dollars. Functionality was secondary, price and [offloading the application] infrastructure was first.”

Sometimes, it's also a matter of cultural fit with an application. Orange Leap, a Dallas-based company that makes software for nonprofits, ditched Salesforce.com for SugarCRM On-Demand two years ago.

"[Price] was one of the many factors for us; we were unique in what we were looking for," said Katherine Burstein, solutions engineer with Orange Leap. "Pricing, usability, it was the open source nature and business methodology. [Salesforce.com] is a different model, the cost is higher, pricing structure is different, the business model, the usability wasn't as friendly."

Recent research from Forrester backs up the idea that enterprise applications buyers in general, and CRM buyers specifically, have become more price conscious.

In an August 2010 Forrester report, 41% of respondents said cost of ownership was one of their top three decision criteria for CRM. Two years earlier only 23% of respondents listed cost of ownership.

And in a 2009 Forrester survey of enterprise applications customers, 58% of respondents listed high cost of ownership as a "very significant" business problem with their implementation, outweighing other options like "business requirements don't match applications" or "the difficulty of upgrades."

"What happens is when all the solutions are mature, they have all the bells and whistles and are similar, then cost of ownership and pricing come into the equation," Band said. "While cost of ownership is down the list [of criteria], in the CRM space most of the major players are very similar to one another."

That makes Microsoft's recent move a wise one, according to Band. It helps to get them on the short list of CRM vendors early in the buying process.

A new role for Salesforce.com?

In some ways, Microsoft's promotional price strategy should be familiar to Salesforce.com, which at one time was itself an upstart company challenging entrenched competitors like Siebel, Oracle and SAP based on pricing and its ease of use.

"They came in as penetration pricing solution, now they're the high cost solution," Band said. "Now Salesforce doesn't want to respond to these price pressures, so they're trying to take the high road talking about 'install base, UI, a proven solution.'"

SaaS has radically simplified the idea of pricing enterprise applications with a per-user per-month model, allowing an "apples-to-apples" comparison.

"With SaaS, the online comparison shopping is so much easier," said CRM Northwest's Pozil. "It makes pricing so much more transparent."

SaaS CRM pricing has put pressure on on-premise vendors as well, forcing them to offer different pricing and hosting options, Band noted. SAP, for example, has begun a rapid deployment application program for CRM and supply chain management due partly to pressure from SaaS vendors.

Another outcome of this new CRM delivery and pricing paradigm is that companies pay even closer attention to the fine print and the service level agreements. For example, to differentiate itself from other SaaS vendors RightNow has released its Cloud Services Agreement, which allows customers to dial up or down the number of seats they license and locks in a six-year price assurance while only committing the buyer to a one-year renewal.

These shifts in the CRM purchasing process and competitive pressures can offer new benefits -- but new challenges as well.

Next in our series: Companies may need to take more care when the time comes for renewals. The deals organizations got when they first signed up may not always be there when the renewal comes around. While SaaS CRM is typically advertised as per-user per-month pricing, agreements are typically three-year deals, creating issues around renewals.

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