Inside Microsoft's New ERP Pricing Scheme

Published: August 2, 2006

by Alex Woodie

Microsoft yesterday began charging for ERP software in a new way. Instead of forcing customers to pick from hundreds of modules, it is now selling a handful of bundles that include all the modules needed to accomplish a given business process, and charging customers on a per-user basis. The move, which was heralded by Microsoft's channel, should make Microsoft more competitive with tier-one ERP vendors SAP and Oracle, and should benefit the company's SMB sales strategy, too.

Microsoft's previous ERP pricing scheme was very complicated, and often resulted in customers paying too much and getting stuff they did not need, or even worse--paying too little and missing out on the software they needed to run their business. And because Microsoft sells all of its software through channel partners that can't deviate much from the published list prices, this complexity put the channel at a disadvantage to competitors that sold directly and could discount their wares, such as Oracle and SAP.

This is going to change under Microsoft's new Business Ready Licensing scheme, which was announced June 10 and took effect yesterday. Under this scheme, Microsoft is now selling its four Dynamics ERP product lines--AX (formerly Axapta), GP (formerly Great Plains), NAV (formerly Navision), and SL (formerly Solomon)--through three packages, including Business Essentials, Advanced Management, and Advanced Management Enterprise. The company also plans to offer CRM functionality as an optional component of customers' ERP purchases, starting with Dynamics GP, although a specific timeline was not provided.

These three packages provide a group of related modules, and are each geared toward specific business functions. For example, the Business Essentials offering will include all of the related financial and supply chain management offerings, while Advanced Management will add manufacturing and project accounting needs, as well as business intelligence and reporting capabilities. Advanced Management Enterprise will build on this base with an enhanced version of supply chain management, field service, configuration, manufacturing, and development capabilities. Customers then pay based on the number of user licenses they purchase. Using Dynamics AX as an example, the customer would pay $2,250 per user for a perpetual license for Essentials, whereas pricing for Advanced Management will cost $4,500 per user. Discounts apply as customers purchase more user licenses.

Joe Gulino, the director of ERP practice at Dynamics AX business partner Green Beacon Solutions of Watertown, Massachusetts, applauds the new pricing scheme. Although the new system is "a little less flexible," he says it was "a heck of a lot easier to price out an opportunity for a customer," he says.

Gulino says the prior scheme was so complicated that some partners failed to accurately order the right modules for their clients. In some cases where one module was a prerequisite for another module, a failure to order the first module meant the customer did not get the required business functionality out of its Dynamics software.

"I think what we're going to do is remove a lot of the confusion," he says. "You almost needed a degree in pricing strategy before. There were a hundred modules, and different levels of users."

Not all AX modules are included in one of those three editions. There are still 20 or so Dynamics AX modules that don't fit neatly into one of the three bundles, which means Gulino will still be piecing together a complete ERP solution for his customers. Many of Green Beacon's customers are in the industrial equipment industry, and therefore require some of these add-on modules, such as the cost accounting module.

For the time being, Gulino is putting bids together based on both pricing mechanisms. "I did the pricing for a prospect, and even though it came out to be a little more money, they were getting 20 percent more software with 5 percent more cost," he says.

As for the impact it will have on Microsoft business partners such as himself, Gulino sees a big improvement. "I'm not sure it will save much time. It's more about clarity . . . and keeping the mistakes to a minimum," he says. "Ultimately, there's less flexibility, but flexibility can add confusion. To have ultimate flexibility added confusion."

The new pricing scheme will also help smaller businesses that have the IT needs of larger businesses. With the user-based pricing, these shops won't have to pay large upfront sums for software, which will enable AX to compete better against the likes of SAP and Oracle mid-market solutions, and aggressive pricing strategies from smaller ERP providers like Epicor Software and others.

For Gulino, this means better traction among small companies in the $50 million range. "It was quite a stretch for them," he says. "Now we can bring them in at a price that makes sense for their budget."