iSeries Vendors Drive Business with Innovative Pricing
by Timothy Prickett Morgan
A tough economic climate is always the best one for what President Franklin Roosevelt called "bold experimentation" when the nation was confronting the Great Depression. Things are not that bad--at least not yet--but there is no question that IT vendors have to be a little more clever and flexible to close deals today than they had to be four or five years ago. I've come across some interesting pricing models from iSeries vendors, which should help us all to think outside of the box.
The examples of innovative pricing I will talk about in this story are by no means exhaustive in terms of what iSeries vendors are doing, but they are exemplary. As you are confronted with a tight IT budget and with users and chief financial officers who want more out of your data center, the kind of pricing options shown below are a starting point for negotiations with any vendor, not just the ones shown below. Also, I have a few ideas of pricing schemes that I have not seen in the market, that may help grease the skids to get more IT projects done and with lower cash outlay.
From Here to Annuity
Business Computer Design In'tl, a long-time OS/400 tools and middleware supplier based in Hinsdale, Illinois, made a splash at the recent COMMON midrange trade show in Orlando when it announced a special deal on its Nexus portal. The Nexus portal, which rides on top of BCD's WebSmart Web application server, aggregates content and applications from all over the corporate network and puts them in a desktop that can be customized and personalized for each user, to reflect the applications they work with every day and the way they like their computer desktop organized.
Nexus has been available for almost a year, and WebSmart has been out for over three years. The problem that BCD faces is that, for some reason, many people think that putting an AS/400 or iSeries server on the Internet or in an intranet or extranet, making it useful to employees and partners for Web-based applications, requires using IBM's WebSphere application server. It doesn't. "The iSeries is the most reliable, secure Web server that no one is using," Eric Figura, BCD's sales and marketing manager, said at a press conference announcing that he was giving away the Nexus portal to the first 1,000 customers who signed up for it. "It's a shame," he added. "IBM has done a terrible job getting people to use the iSeries on the Web. So we are taking the lead."
With the launch of Nexus 1.2, BCD is giving away Nexus to the first 1,000 users who ask for it. This software normally costs $12,000 for an iSeries with a single instance running or $21,000 for a multi-instance license spanning multiple partitions. In both cases, those licenses cover an unlimited number of seats. The only thing that BCD is requiring is that customers pay for annual maintenance charges, which are $2,195 for the single instance license and $3,795 for the multi-instance license. IBM, according to BCD, charges anywhere from $33,000 to $87,000 for its WebSphere portal, and the WebSphere Application Server on which it runs usually requires a substantial hardware upgrade to work properly. WebSmart and Nexus can work on tiny AS/400 and iSeries servers without an upgrade, says Figura. So far, more than 100 companies have signed up for the free Nexus licenses since they were announced three weeks ago. At best, we estimate that IBM has a few hundred customers using the full-fledged WebSphere in production on AS/400 and iSeries servers after years of promoting it; it is hard to say how many portal customers it has, since the WebSphere portal is such a new product.
The Nexus license giveaway, which looks an awful lot like BCD is sending up trial balloons on newer and lower prices, isn't the real interesting bit. Another deal that BCD has cooking might have a much more pervasive effect on the iSeries market. BCD is giving the Nexus portal away for free to any iSeries business partner so they can create portlets for their OS/400 applications. And if they use Nexus as a front-end into their applications, they can distribute it free to their user customers, too. All those customers have to do is pay an annual maintenance contract on the Nexus license.
Under yet another BCD deal, any business partner, consultant, or independent software vendor that signs up to be a BCD partner can get a suite of development tools from BCD--including the WebSmart integrated development environment and Web application server, Nexus, ProGen Plus, DbGen, Catapult (report distribution) and a whole bunch of other tools--for free. Typical business partners or independent software vendors would have to pay $50,700 for their shops to acquire all of these tools, says Figura. To get the free licenses, they do have to pay for annual maintenance on these programs, which would run to $9,245. That is a very big price cut. Clearly, BCD is hoping to make it up in volume and to get its tools more widely used in the iSeries market.
Like a Saxophone, ERP That's Rent-to-Own
You may want a new ERP suite, but you might not have the money to acquire it in one fell swoop. The people at CMS Manufacturing Systems, who have been selling into a very skittish market for the past three years, understand this. And that is why the company, based in Nashville, Tennessee, has created a rent-to-own pricing scheme for its CMS 400 ERP and supply chain management suite of applications for AS/400 and iSeries servers.
The advent of this pricing scheme is not the computer business but school band. Brian Angle, vice president of sales and marketing at CMS, had a kid in the sixth grade last year, who wanted to join band. So Angle took his son to the music store, and his kid picked out a saxophone to learn how to play. Now, as we all know, kids do not necessarily make strong commitments to learning how to play any particular instrument, so shelling out $1,200 to buy the saxophone was not a very attractive option for Angle. The music store owner knew this, so he told Angle about a special rent-to-own deal he had created. He would charge him $45 a month to rent the instrument for the first eight months (which is equivalent to a full school year) that his son had the saxophone. Those first eight months of rent would accrue 100 percent toward the purchase of the saxophone. After eight months, he could buy the saxophone outright for the remaining $840, or he could keep renting it at $45 a month indefinitely. If he kept renting, the $45 a month stopped accruing. The music store owner figured a parent would know if his child was really going to stick to an instrument in eight months. One other facet of the deal: Angle had to put up the first and last months' rent for the sax, just like a security deposit that most people have to give to rent an apartment.
So at the end of 2002, when CMS was trying to push ERP and SCM software into a market with ever-lengthening sales cycles, Angle decided to give the rent-to-own idea a spin on ERP software. "I personally hate renting," says Angle, "but I don't mind renting when it accrues toward purchase." It is a great idea, and the plan that CMS has come up with seems very fair to prospective buyers who do not have a lot of cash but want to modernize their applications.
Here's how it works. For a typical user, the CMS 400 suite costs between $50,000 and $200,000 to acquire; bigger companies with lots of users and modules can pay more than this, but this is the sweet spot for CMS. Under normal selling conditions, it can take a long time for a small and midsized business to come up with that cash. And while CMS has a full money-back guarantee, most software companies do not. You buy it; you're stuck with it. Rent-to-own is very appealing because customers get to try out the code before committing to it. This could be a serious differentiator for CMS.
Here's how the CMS rent-to-own deal works. The average customer will have a monthly rental rate of between $3,000 and $6,000 per month, depending on the number of users, the size of the machine, and the number of modules. Companies figure out what they want, and CMS reckons the monthly rental fees for the options in CMS 400 they choose. The prospective buyer and software renter then pays the first and last months' rent for the software licenses. Rental fees from months one through eight accrue 100 percent toward the cost of the acquisition of the software. In months nine through 16, two-thirds of the rental fees accrue toward purchase. In months 17 through 24, 50 percent of the rent accrues. After 24 months, companies can continue to rent, but no more money accrues toward the purchase of the software. Watch how the math works.
Let's say the CMS modules collective cost $100,000 on at a particular customer. The monthly rental fee would be around $3,000. In the first eight months, it really is a try-and-buy deal that is great, because all the money accrues toward purchase of the software. But if they go the full 24 months without buying, they get to use the software for two years at a cost of $72,000, and more than $52,000 of that $72,000 has accrued toward the purchase. If they want to buy the software at this point, they cut a check for a little under $48,000 and they own it. Clearly, CMS is betting that most customers will make up their minds in eight months or less, and the first couple of customers who have chosen this option have done so.
ERP Under ASP
Remember when the application service provider (ASP) business model was going to take over the world back in the late 1990s? The idea was that companies, frustrated with supporting their hardware and applications, would offload it to a service bureau, much like hundreds of millions of individuals do for Web access and e-mail today. Well, it didn't take off as planned, probably because IT managers and programmers are not so eager to give up their applications and their jobs as many of us had expected. (Nine times out of ten, cultural and personal issues are what always slow down or stop technological innovation.) But in an adverse economy, companies are re-examining the possibilities of the ASP model.
Back in March 2000, Bill Scott, the owner of Scot Systems, a software vendor that had a suite of RPG applications to run gas stations and convenience stores, decided to get into the ASP game. He took his applications live on the Internet back then, in his home office in Jackson, Mississippi, on an AS/400 linked to the Internet via a DSL line. By March 2001, Scott officially launched StoreReport.com and got an Internet service provider, Computer Resource Systems, to provide AS/400 capacity on a hosted basis. The company started out on an AS/400 Model 720 and has since upgraded to an iSeries Model 820. CRSI is based in Englewood, Colorado, by the way, but given the nature of the ISP model, the location of the OS/400 servers running the StoreReport.com applications is irrelevant.
What is relevant, however, is how difficult it has been to get this ASP model off the ground. It has taken years to get the 80 customers that StoreReport.com now has, and Scott pumped hundreds of thousands of dollars of his own money into the venture, which lost lots of money at first, as new businesses usually do. But last year, StoreReport.com actually made a profit, and last week Scott was able to secure $3 million in private venture capital that is going to take the ASP and his use of the OS/400 platform to a new level. Scott now has 62 markets he will target with his ASP approach, and he has the backing to start doing it.
The StoreReport.com application suite is essentially a wholesale gasoline distribution suite that has a retail system for convenience stores bolted onto it. Internet-based cash registers can link back into the system, too. StoreReport.com charges $200 per month per retail location to use the ASP-based application, and charges $299 per month per location for sites that want to integrate their back-office operations into their store locations through the StoreReport.com systems. Scott says he is making money at this pricing but has another idea for making some extra dough. The StoreReport.com application has 175 prefabbed queries that should, in theory, cover most of the ad-hoc queries that people need. But Scott says that he is spending most of his time adding queries for customers. Soon, he is going to start charge $28 per query for this coding. "When users find out they can get anything, they will ask for everything," he says.
StoreReport.com has put together a return-on-investment tool for its sales team to help pitch using the ASP model over doing it in-house. Scott says that he can save an operator of 200 stores as much as $1.8 million a year in IT, administration, and personnel costs if they have to support the same application in-house. He says that he can do the same job for 40 percent of the amount that it takes to do it in-house. That 60 percent savings is going to get a lot of attention in this economy, regardless of how hyped the ASP idea was a few years ago.
Other Problems and Possibilities
In the on-demand world that IBM is trying to foment, tiered server pricing, user-based pricing, and processor-based pricing are all unfair to certain customers under certain circumstances.
For one thing, the whole idea of on demand computing and dynamic logical partitions is that you can allocate as little or as much computing resources to a particular piece of software as an application workload requires. Even partition-based pricing, which has not taken off on any machine with logical or virtual partitions (including but certainly not limited to the iSeries), is really insufficient. What is a partition? Is it 10 percent or 50 percent of a processor, and therefore 10 percent or 50 percent of the cost of perpetual license to the software?
IBM's on-demand pricing for some iSeries hardware and software, where it takes the cost of acquiring that software and essentially divides it by 45 to come up with a daily hardware or software fee, is ridiculously high.
If IBM really wants to do this right, it should stop messing around. All processing, storage, and I/O capacity in an iSeries, as well as the usage of OS/400, DB2/400, and other tools, should be available on a fair and sensible metered rate. IBM should, for example, be charging for hardware on the basis of dollars per CPW used per day, week, or month. To get that rate, IBM should reckon what the real economic lifetime of each iSeries server is--36 months is fair but not generous--and divide that cost by the number of days (1,095.75, to be specific). That is the daily rate for hardware. Now break out DB2/400, RPG, and so forth, and do the same thing. Do it for memory capacity, disk storage, and other components like I/O boxes. IBM can meter the usage of hardware and software on a per-CPW or per-MB/sec basis (or come up with a different metric). That is fair on-demand pricing.
Think about it. What small or midsized customer wouldn't opt for daily renting of capacity that ranged from $15 to $45 a day for a decent-sized machine, instead of shelling out $50,000 upfront, to get started? If the iSeries is such an efficient computer and has such great workload management capabilities (which allow it to do many things on the same machines), IBM should not be afraid of this idea. It should be at the forefront of trying to show other companies that it can do with the iSeries what they cannot hope to do with a Windows or Linux box. And if IBM doesn't do it, some business partner who can buy lots of iSeries iron on the cheap should.
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