The Cost of Selling Software - US$250,000 per deal

Jim Farmer has prepared a very interesting analysis of what it costs to sell an Enterprise Learning System, concluding that the sales and marketing costs of each Blackboard signing are around US$250,000.

Now open source advocates can sometimes over-emphasise the costs and failings of commercial software, but Jim's comments in the paper are very fair, reminding readers that "The high cost ... is influenced by the ... demands of potential clients." and that "... software suppliers have been asked to ... subsidize user groups, and support higher education initiatives." His paper is well worth reading in full.

(Jim told me three years ago that open-source search engines and campus portals would soon make library automation software - and libraries - obsolete; and it still scares me.)

I know something about the cost of sales issue, having sold library automation software for most of the past ten years (at Innovative and Dynix). I have long said that it costs the major ILS/LMS vendors an average of about US$50,000 per bid, which means that for a typical mid-sized university deal, five competing bidders will spend US$250,000 between them: and only one will win, so again that is US$250,000 per deal.

Of course an individual vendor's costs per deal are very dependent on the win-rate, something Jim has not really looked into.

As a deal like this might only have revenues of US$250,000 anyway, it means the library community has paid US$250,000 to the library software vendors and none of this has gone into development – it was all spent on sales and marketing.

I think all this raises three main issues:
- What are these costs and why are they being incurred ?
- What could or should be done differently ?
- Where does open source fit into all this ?
I propose to deal with each of these subjects in turn in future blogs.

Let me leave you with a intriguing thought:

Assuming that WebCT and Blackboard used to compete (with sales & marketing dollars) in every deal - once they are merged (if they still collectively win the same number of deals), they will collectively save US$250,000 per deal, and this saving could be passed right on to the customer. So reduced competition is a wonderful thing for customers, as it cuts sales costs and so reduces prices. Right ?

But hang on, when I was at Dynix competing with Sirsi, the libraries would 'shortlist' five suppliers and I had, crudely, a 20% chance of winning, and Sirsi had a 20% chance - so 40% between us. But now, SirsiDynix combined only has a 20% chance on that 5-vendor shortlist, so the costs per bid are the same and the costs per win are unchanged too - so no savings there.

Hummm.....more analysis needed

(Thanks to Michael Feldstein for drawing Jim's report to my attention in Blackboard by the Numbers in his blog, e-Literate.)