ERP Part Two - The Economics of Selling ERP By Ann Grackin Published on Dec 14, 2010 Software companies manage themselves and their costs very differently, and that makes serving small, midsize or large markets easy or challenging.

ERP packages are quite expensive to develop and support. And once developed, that sales process can be very arduous for both the end-user and the technology firm. Long meetings, gathering requirements, demos, long travel to and from the client, long travel to and from classes. It goes on. The cost of managing an ERP firm obviously has to be reflected in the price to the customer. And here is the key issue in ERP economics: Can a Big ERP sell to an SMB?

SMB Concerns

So the question on economics of the business is critically important. Small businesses have unique concerns such as:

• Complexity — Although their business can be very complex, they can’t afford software that is complex to implement and hard to understand. They need easy business intelligence and reporting.
• Support — How much is the TCO—especially the staffing to manage the ups and downs of tech.
• Multi-functional challenges — They sell, service, build, import/export, manage employees and all that jazz. Don’t they deserve a robust capability for these?
• Technology adoption — We often think of SMB as Main Street, or the ‘late majority’ waiting for ‘the kinks’ to get out of the emerging technologies. However, they can be amazingly progressive when dealing with their core business concerns. I have had clients with pretty bland accounting software packages, but the latest warehouse equipment. Or Retailers with great POS systems, great inventory management, and just plain bad purchasing systems.

Right! But how does that play out on the ERP solution provider side?

Keeping Up With the Joneses

The software industry is highly competitive, and therefore there is a tendency to be constantly looking over the fence at what the other guy has and making sure that you have it too. And tech firms have to do this. It is not a capricious action. Not only do better tools and technologies come along that make development, integration, access and support easier, faster and cheaper, but customers obviously have long lists of requirements that come without end!

Focus Focus Focus

And here is where focus comes in. I am asked constantly, “Well those little guys can’t have really deep software,” or, “I would be nervous thinking about a provider that caters to small business, since they have to be pretty lightweight solutions, right?” How they deal with the heavy weight of the never-ending requirements is by knowing their audience. If you are an expert in the hospitality business, that is far different than a manufacturer. You won’t see a company try to scale that distance in one package. Staying on message, staying on focus, allows the firm to carefully manage the user requirements. It also allows them to focus their sales efforts.

Cost of Sales

Sales and Product strategies can significantly impact the operational costs of a company. You have to wonder about what you get and how you can spend so modestly on software—thousands vs. millions.

Here are a few things that impact sales cost:

Products/Product Strategy — Multiple products in the portfolio increase the size of the sales team. With a large selection of solutions, no one sales account exec can represent the portfolio. You may have multiple account execs determining what the right package is for a customer—as we discussed above. What is the focus, and therefore which package should we sell? Process Mfg; hospitality focused solution; or one for a wholesaler, etc.

And then there is pre-sales expertise. A single product focus really reduces the complexity of the sale. The sales team does not need an army of pre-sales people who have unique expertise in each of the product areas. All associated costs with these personnel are gone—less travel ‘counts,’ less traveling people per sale, etc.

Sales Model — Selling over the web, through distribution channels, direct, or some combination thereof. Web selling, if possible, is extraordinarily cheap in many ways, but not as cheap as you think. Beyond the attractive web site, there are the myriad of product directions, Google add words and other web methods to draw prospects to your site (though these types of strategies and expense are being used by everybody these days).

Though adding distribution channels reduces a lot of headcount, you do have to give the partner their fair share, often. Pooling of market expense in these relationships also helps keep costs down.

Direct is most often the most expensive. Though armed with arsenals of lead gen tools to feed the sales team, the costs here can really add up. Inside sales teams can be costly, even though the mode today is to outsource much of this. However, using that approach can really leverage the high-power sales people you might have around. And in direct sales, you get what you pay for. Companies that do this ‘on the cheap’ may be sorry over time.

Here is a view of how the ERPs for the SMBs stack on this. I want to note, this is merely directional and not an absolute. No one surveyed was asked exactly what their sales budget was, nor am I stating such. I am just conjecturing, based on the product portfolio and sales strategy what is probably going on in these types of companies. The author takes full responsibility for this.¹

Going On-Demand

Another issue we have talked about a lot is SaaS/On-Demand. (Read Cloud Economics- The End of the Entourage)

Extending sales within an account happens in a much more organic way, further reducing sales costs. Since the SaaS solution provider ‘never goes away,’ there is a constant stream of interactions; It is easy for end-users to grow on the platform, rather than a new engagement with a long cycle to discuss and possibly purchase upgrades, new revs, etc. I do want to point out that, if you need it, there is no substitute for a human, so this is not a recommendation!

Conclusion

The fact is, SMB’s percent spent on technologies is just lower than their bigger brethren corporations. So they are seeking out more affordable solutions. We are seeing novel approaches from the likes of SAP with their Eco-hubs, to try and reach the SMB market. But when you buy SAP, the cost of the whole company comes along. This is not a criticism, it is just a fact, as we have discussed in previous writings. Legacy can be beautiful, but that might come at a price that the SMB is just not able to pay.

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