B2B Analysts
About the Company   Services   Research   Pressroom  
Short Takes
Profit Optimization

Redwood City

Oracle Announces New Suite Pricing

Oracle tinkers with its price structure, making off-the-shelf buying slightly easier.

Bottom Line

Oracle has announced a restructuring of its e-business suite pricing, making it slightly easier for small companies to buy the suite. The move signals no change in Oracle fundamentals; it is purely tactical, removing an irritant for some customers that was probably not anticipated when the original suite was announced.

The Background: Package Bundling at Oracle

The new E-Business Suite 2003 Pricing is different from the old pricing in three ways:

  • The minimum number of users is reduced by 10 percentage points to 10% of the workforce. (Or at least that's what I think Oracle's cryptic wording means.)
  • The $250,000 threshold for the suite is eliminated.
  • The number of components included in the suite has been reduced.

The effect will be to simplify pricing and (probably) lower prices very slightly for certain small and medium-sized businesses that want to buy at a single, simple, bundled price.

To understand why this will be the effect, you need to go back a ways. Two years ago or so, Oracle decided to publish its prices on the web and allow people to buy software off the shelf. They established a separate per-seat and minimum-seat pricing scheme for each of its 40-odd application modules.

Large customers who were buying lots of modules, however, thought that this was too complicated. If they were buying all or most of the modules anyway, they just wanted to count the users and figure out the cost from that. Oracle therefore developed a bundled pricing option called e-business suite pricing. You got all the modules and a single price per Professional User seat. This made things easier for people who were budgeting purchases of new seats or new modules and so gave some predictability to the price.

The idea was (and should be) that the amount of money paid under the e-business suite pricing and the amount of money paid if you bought each component separately would be roughly equivalent. If the two models weren't equivalent, customers would waste a lot of time trying to switch between models in order to get a slight price break, and the gain in simplicity would be lost. Yes, the e-business suite would have some form of volume discount built in, but there were also volume discounts built into the component prices.

Unfortunately, the original bundled pricing model had what appear to be minor flaws. Foremost among them is that some self-service suites (like HR) had a large number of users who were not Professional Users. To use those suites, you'd end up having to pay for more Professional Users under the e-business suite pricing than you wanted to. There was also a $250,000 minimum, which apparently seemed daunting to some potential buyers.

The changes are an attempt to fix those flaws. By paring down the e-business suite so it only includes core modules and by allowing people to add on the self-service suites using component (per actual user) pricing, they eliminated the requirement to buy more Professional User seats than were needed. By eliminating the $250,000 minimum, they eliminated a real or perceived barrier. C'est tout.

A Minor Effect

In the announcement, Oracle presented two examples where a company would be able to buy the e-business suite with a significantly smaller cash outlay under the new plan.

On the call, several analysts apparently concluded from these examples that prices are going down significantly. I don't think so.

The large price drops in both examples appear only because the examples are not terribly realistic. (They are good examples in that they illustrate the point, but they aren't like anything that an actual company would do.)

To check this, I put on my CIO hat and pretended I worked for each of the example companies. I went to the Oracle store and bought the modules they mentioned using component pricing. In both cases, the total price at the Oracle store was significantly less than the new, "lower" total price with E-business Suite 2003 Pricing. I think this is generally true. In most cases where the new pricing would theoretically produce a significant price drop, component pricing would be a still superior option with even lower prices.

In fact, certain kinds of buyers might actually find that the new pricing is more expensive than the old pricing. Because so many "small" components have been dropped from the e-business suite, a company that wanted a lot of those components might end up paying slightly more. Again, it's easy to construct examples where this might be true, but most are quite unrealistic.

Even if the price were greater, though, I think a lot of customers who want a bundled price will prefer the smaller bundle because they want control over the timing and total cost of their purchase of add-on modules. So if you do start thinking of this as a price increase, don't then think that Oracle is discouraging customers.

Pricing Trends

Many canny observers think that these academic discussions of pricing policies are completely ludicrous. They believe that the only pricing policy actually operative anywhere in the industry is what I have long called wallet pricing. You look at the size of the wallet and that's the price. Whatever Oracle's pricing model, they say, the actual prices are much, much lower in these parlous economic times.

I am not in a position to say whether these observers are right or whether the frequent reports of heavy discounting by Oracle or other vendors are true. It is Oracle's stated position that they do not discount applications from the published price. I will say, though, that there are loopholes in that position large enough to fly a 747 through, and heavy discounting in tough times wouldn't be a surprise in this industry.

If you do care about pricing models, however, there are a few things left to note about this move.

Most important, Oracle is falling in line behind PeopleSoft in establishing a structure that allows them to develop and sell small modules at prices that are low enough to feel reasonable to the buyer but high enough to make a difference at quarter-end. Oracle now has a simple base price and add-on prices for new, small modules, which is a prerequisite. SAP, so far as I know, has still not really figured out how to do this.

Also worthy of remark is the fact that open, published pricing hasn't really caught on in the industry. Nobody else has a store where you can buy modules off the shelf, and nobody seems to be thinking of putting one in. And Oracle doesn't seem to have reaped the benefits from this that they might have hoped. I have literally never heard anyone say, "Well, at least from Oracle, you know what you get and you know how much it costs."

But, finally, I will say that their pricing policies and strategy have made me feel better about them. When I first encountered Oracle, its behavior in sales situations made the word "egregious" seem like a compliment. This new openness and clarity, at least in pricing, is such a departure from the way things used to be that it has made me think that maybe things have really changed there. See, even the old curmudgeon can have fits of optimism.

To see other recent Short Takes, click for a listing.