Bad Times, Good Prices? Not So Fast

Does a sour economy lead vendors to lower costs? In the enterprise space, there's a good chance it does, although there's little proof until it's time to sign a contract.

Does a sour economy lead vendors to lower costs? In the enterprise space, theres a good chance it does, although theres little proof until its time to sign a contract.

Take CRM, for instance. Every CRM vendor is hurting badly. Back in April, Tom Siebel called the economic situation a complete "global economic recession," and that was when his company posted pretty good sales numbers. It went downhill from there. The competition went on to post warnings and announce layoffs.

Were supposed to assume, I think, these bad earnings announcements and profit warnings are the result of a massive scaling back on demand. If everything works out correctly, this lack of demand, in turn, should result in lower costs.

Im not entirely convinced that the law of supply and demand applies when it comes to enterprise software, since big applications arent something that fits into the ordinary definition of a supply. Whats the supply? The little installation disk? The vendors capacity to supply? There still must be something happening to CRM prices—they must be falling.

But theyre not—at least, not publicly. It turns out that if these vendors cut costs publicly, theyd find it really hard to ramp back up when the economic climate becomes more favorable.

Nick Siragher, director of Hewson Consulting, said that instead of cutting the price of software (egads!), the vendors will "slash payroll, close facilities and reduce costs. ... Theyve too much to lose by a price war, and, given that many of them were top heavy on costs as we came into this period, there is some chopping to do."

In other words, we wont see the price of CRM or any other enterprise application plummet because the vendors did not anticipate anything but a full-on growth market, and they dont want to get hurt again if that growth market ever returns.

However, Mei Lin Fun, CRM analyst at Wainscott Venture Advisors, thinks prices will float in relation to the economy. In a bad economy, the prices should drop, but price cuts will depend ultimately on the value companies see in CRM. That value is not being realized by many companies, which would lead to overall price cuts.

So where are they? Theyre hidden, of course. Kickbacks, extended services and bargaining are all part of the game now, making the actual price of the software as amorphous as the value of the products.