Pricing, Discounts and Support Costs
Pricing for Enterprise IT hardware and software can be a strange process, and settling on a vendor quote is a complicated dance. Junior engineers normally are more focused on technology, and don’t see everything that goes on with pricing. When they do first get exposed to it, the whole thing can be a bit of a shock. Recently I was talking to some new engineers about some of the things I’ve learned over the years over pricing, discounts, support costs and payment models.
List Price and Discounts
You will commonly see references to software and hardware list prices. List price is a fiction, and bears little to no reality to the actual price you will pay. No-one ever pays list price. Always keep that in mind. List prices can give you an indicative idea, but vendors discount policies vary wildly - some give 20% discount up front, others can knock 90% off the list price. It’s hard to compare between vendors- the best you can hope for is to know the normal range that.
Software discounts are also usually far greater than hardware, because the marginal cost of software is near $0. That means that anywhere between $0 and full list price, there’s a deal to be done. Even companies that publish prices with links to an online store will do deals - just see what happens if you sign up for a SolarWinds quote/trial, and then don’t buy it within a few weeks.
If you can’t find any public references to list prices, then just assume it will be expensive. If you must have multiple meetings with sales people before prices are discussed, it will be very expensive. They’ll hook you in with ideas about the ‘value’, softening you up for an enormous bill.
Vendors will use various tricks to make it look like they’re giving you a good deal - e.g. it may be cheaper to buy three products bundled together than to just buy the one you need. Another classic sales technique is to offer many more features and add-ons for just a small extra consideration. Of course, you never wanted those extra features, may never use them, and now you’re going to have to pay support costs for them.
If you balk at the initial quote, don’t throw it away, unless the price is astronomical. Go back to the vendor, and tell them it’s too high. If they’ve already invested sales effort, they’ll be keen to figure something out, especially if it’s nearing the end of the quarter. A good vendor should be able to re-work a deal, but there should be a bit of give and take. They might take out some of the extras to lower the price, or they might offer to throw in free training to improve the value. You can give them something too - e.g. say you’ll sign up for a 3-year deal, and they’ll have increased internal leverage to offer better pricing.
Occasionally vendors will turn around and massively discount their original quote, without changing any other terms. I believe this is extremely dishonest practice, and I refuse to do business with people like that - they would have been quite happy to bank the extra commission. Any increase in discount should be nominal, unless there are significant changes to the terms of the contract.
When you purchase Enterprise-level hardware and software, you usually want some sort of support attached to it. This covers things like:
- Software updates - access to all new versions, including major releases
- Hardware replacement (if relevant) - vendor commitment to provide replacement hardware within an agreed timeframe - e.g. within 4 hours 24x7, or next business day
- Software support - ability to log case for configuration issues, or bugs. Depending on support contract level, this can range from email ticket support through to full 24x7 phone support.
Support costs are generally calculated as a percentage of the value of the software or hardware, e.g. 10-20% of the price. Customers like these support contracts, because it gives management somewhere to escalate things to if you’re having problems. For expensive hardware, it’s much cheaper to pay for a guaranteed response time to replace it, rather than holding spares yourself. For low-end hardware, it might be easier to just chuck a couple of spare switches in the cupboard.
Usually there is a choice in the level of support offered, with corresponding price steps. There may also be variations depending on if the support is through a partner, or directly with the vendor. Note that there are also lifecycles defined for software and hardware support - beyond a specific date, vendors will either completely stop support, or charge astronomical fees. Vendors may also start increasing support costs for older hardware, as it approaches the end of its life.
So far, so good. The catch here is that you must pay VERY close attention to the price the support percentage is calculated on. A classic bait-and-switch is for a vendor to offer an enormous discount off the list price to entice you to buy the product. The purchase price usually includes the first year’s support too. But then you go to renew your support, and find out that they’re calculating the support percentage from the ORIGINAL LIST PRICE! I have seen scenarios where the Year 2 support cost is the same as the Capital cost outlaid in the first year! This can absolutely wreck your budgets - the project team spent their budget, and now the Operations team has a big hole in their finances. But the project was considered a success, because we put too much weight on CapEx cost, and not enough on TCO.
Vendor policies will vary here - some will discount their support costs as they discount their buy costs. Others will tell you that they have no way of discounting support costs. This might be true, but they come back in 6 months time singing a different tune, and now magically they can lower their support costs to get that deal signed off.
Pay attention. Make sure you know exactly what your costs will look like over the expected product lifecycle. You don’t want to find yourself effectively paying for the product twice within 3 years.
If you’re making a small purchase, then you’ll generally pay for that shortly after delivery. But if you’re doing a larger deal, or a software and services deal, vendors can give you many different payment options - e.g. you might be able to pay your support costs on a monthly basis, rather than annually. Multi-year support costs can be bundled into the up-front purchase price.
Or you might have an agreement where license enforcement is “soft”, and you buy a set amount of licenses now, with an annual tally-up, to see if you need to pay for some extra licenses you’ve started using.
Some large software vendors will also have plans where you pay them an enormous sum, and you can use whatever products you like from across their whole range, with whatever mix of license counts makes sense for you.
Products like ScienceLogic offer both perpetual and subscription-based licensing, so you can find the mix that works for your revenue streams and your accounting policies.
It’s all a Game
Remember, this is all a game. If you’ve got money, and vendors have product, then a deal can be reached. Don’t be afraid to ask them to structure the deal differently, or add in a few extras such as free training or product add-ons. A good sales rep can actually help a lot here, as they will help you craft things in just the right way to make it acceptable to you and your upper management. But never fully trust people in sales. Their goals are not your goals, no matter what they say. Someone has to pay for their shiny suits and flashy cars.