Enterprise Resource Planning (ERP) systems are vital in streamlining business operations and processes. However, when it comes to implementing an ERP system, one of the most common questions that arises is, "How much does ERP software cost?"
The answer to this question is not as straightforward as one might hope. There are a number of factors that affect the true cost of ERP ownership which include the size and complexity of your business, the number of users, customization requirements and the chosen deployment method, among others.
In this eBook, we will look into the specifics of ERP pricing, exploring the different pricing models, hidden costs, and industry-specifi c considerations.
What is ERP Total Cost of Ownership (TCO)?
ERP TCO for Small Businesses
Small businesses, those that generate around $1 million in annual revenue, face unique challenges when it comes to ERP costs. The monthly cost for an ERP solution for these businesses ranges from $1,740 to $4,620 (not including the initial implementation or user training costs).1* This translates to an annual expense of between $20,880 and $55,440. The number of employees within small businesses can vary from 50 to 150, leading to major fluctuations in the per-user ERP cost.
Therefore, carefully evaluate your business' requirements, and choose an ERP solution that aligns with your budget and operational needs.
ERP TCO for Midsize Businesses
Midsize businesses, with annual revenues between $50 million and $100 million, face a different set of challenges in terms of ERP costs. The monthly expense for an ERP solution in this segment ranges from $4,620 to $5,160.1*
As the number of users increases, so does the cost of ownership. It is important for your midsize business to consider factors such as scalability, customization options and integration capabilities when selecting an ERP system. Additionally, ongoing support and maintenance costs should be factored into the total cost of ownership calculation to ensure a comprehensive understanding of the financial implications.
ERP TCO for Enterprises
Enterprise-sized organizations, with over 1,000 employees and annual revenues exceeding $100 million, have more complex requirements and higher total cost of ownership considerations. On average, an enterprise-level business can expect to spend $9,330 per month on an ERP system.1*
However, when evaluated on a per-user basis, ERP costs for enterprises may be comparatively lower than those for small and midsize businesses due to potential bulk user discounts. Enterprises should prioritize factors such as scalability, multi-site capabilities, security and compliance when selecting an ERP solution.
Therefore, conduct a thorough analysis of the TCO to ensure the chosen system aligns with your organization's long-term goals.
Understanding ERP and Its Modules
Before you can estimate the true cost of ERP ownership, you must first understand the various modules your chosen ERP has available. While an ERP system centralizes your organization's data and processes, most offer flexible solutions via add-on modules that provide you with specifi c tools to manage various segments and departments of your business operations. The following are the key modules of most ERP systems:
Accounting and Finance
The accounting and finance module of an ERP system helps your business to streamline financial processes, offering features such as expense planning, revenue management, budgeting and tax management. This module provides you with real-time visibility into your financial data, enhancing transparency which enables better financial decision-making.
Customer Relationship Management (CRM)
The CRM module of an ERP system enables your
business to improve client-facing operations, including sales funnels, marketing and customer service. It allows for the centralization of customer data, enabling consistent tracking of prospects and customers. This module facilitates better lead generation, customer servicing and overall relationship management.
Supply Chain Management
The supply chain management module assists your company in tracking and managing the flow of products from manufacturing to distribution. It includes features such as vendor scheduling, inventory purchase, shipment tracking and product returns, ensuring efficient supply chain operations.
Inventory Management
The inventory management module helps your business to effectively manage inventory stocks. It offers features such as inventory control, automated ordering, inventory scanning and purchase orders, ensuring optimal inventory levels and efficient stock management.
Manufacturing
The manufacturing module is designed to support production-oriented facilities, providing tools for managing shop floors, quality control, work orders, product lifecycle management and engineering process planning. It streamlines manufacturing processes and ensures efficient production operations.
Human Resources
The human resources module helps your company streamline HR processes, including hiring, onboarding, performance management, attendance tracking, payroll and learning management. It simplifies HR operations and enhances employee management.
Business Intelligence
The business intelligence module enables your company to analyze and process large volumes of data from various sources, allowing for data-driven decision-making. It offers features such as customizable dashboards, real-time data access, interactive visualization tools and report generation.
Factors Affecting ERP Costs
When estimating the total cost of ERP ownership, consider the following factors:
Business Size and Complexity
Larger organizations with multiple business units and complex operations generally require more robust and customized ERP solutions. These solutions often come with a higher price tag due to the need for additional modules, more extensive implementation processes and ongoing maintenance and support.
Smaller businesses, on the other hand, may be able to opt for less complex ERP systems that offer the essential functionalities they need. This can help keep the costs down while still reaping the benefits of integrated business operations. It is important to carefully assess your organization's unique requirements and align them with the capabilities of the ERP system to ensure a good fi t and avoid unnecessary expenses.
Number of Users
The more users there are, the more licenses or user subscriptions are required. Each user adds to the overall cost of the ERP system. It is essential to accurately estimate the number of users upfront to avoid unexpected expenses later on.
In addition to the number of users, the roles and permissions assigned to each user can also impact costs. If your organization requires different levels of access and functionality for different user groups, then this customization can lead to higher licensing costs, since more advanced user roles often come at a premium.
Customization Requirements
Every organization has its own unique processes and workflows. For this reason, customization is often necessary to tailor the ERP system to meet your organization's specifi c business needs. However, customization can significantly impact the overall cost of the ERP implementation.
Customizations usually involve modifying the software's code or developing additional functionalities. These changes require skilled developers and can extend the implementation timeline. As a result, customization efforts can increase both upfront and ongoing costs. It is essential to carefully evaluate the extent of customization required and strike a balance between meeting your organization's needs and managing costs effectively.
Deployment Method
There are two primary deployment options: on-premise and cloud-based, or a hybrid of the two.
- On-premise ERP systems require your organization to host the software on your
own servers and infrastructure. This means that your organization is responsible for hardware procurement, installation, maintenance and security. On-premises deployments generally require a significant upfront investment in infrastructure and IT resources, resulting in higher initial costs, while saving in monthly subscription costs.
- Cloud-based ERP systems, on the other hand, are hosted and managed by the ERP
vendor. Your organization pays a subscription fee based on usage, typically on a monthly or annual basis. Cloud-based deployments eliminate the need for upfront infrastructure investments and reduce ongoing maintenance costs. However, it is important to carefully evaluate the long-term costs of cloud-based deployments, as subscription fees can add up over time.
Additional Modules
ERP systems often come with a core set of functionalities that cover the essential business operations. However, your organization may require additional modules to meet your industry-specifi c requirements or address your unique business needs. These add-on modules can range from specialized finance and accounting modules to industry-specifi c functionalities such as inventory management for manufacturing businesses.
The cost of custom modules varies depending on the complexity and functionality they offer. Your organization should carefully assess the necessity and cost-effectiveness of each additional module to avoid unnecessary expenses. It is also crucial to consider future scalability and the ability to integrate new modules seamlessly as your organization's needs evolve.
Implementation Process
The complexity and duration of the implementation process depend on various factors, including the size of your organization, the number of users, the customization requirements and the availability of skilled resources.
Your organization should allocate sufficient time and resources for the implementation process to ensure a smooth transition and minimize disruptions to business operations. It is also advisable to engage an experienced ERP implementation firm who can provide guidance, expertise and project management support. While the cost of engaging an implementation partner adds to the overall expense, their expertise can help your organization avoid costly mistakes and ensure a successful ERP implementation.
Maintenance and Support
ERP systems require ongoing maintenance and support to keep them running smoothly and address any issues that may arise. The cost of maintenance and support can vary depending on the complexity of the ERP system, the level of support required and the responsiveness of the ERP vendor.
Maintenance and support costs typically include software updates, bug fixes, technical support and user training. It is crucial for your organization to consider the long-term cost implications of maintenance and support when evaluating ERP solutions. Engaging with a reliable and responsive ERP vendor can help minimize downtime and reduce the overall cost of ownership.
Industry-Specifi c Considerations
Different industries have unique requirements and regulations that can impact ERP costs. For example, industries such as healthcare, pharmaceuticals and food production have stringent compliance requirements that necessitate specialized functionalities and additional security measures. These industry-specifi c considerations can result in higher costs for customization, implementation and ongoing maintenance.
It is important to carefully evaluate ERP systems that cater to your organization's specifi c industry needs. Engaging with ERP vendors who have experience in your industry can help ensure compliance and minimize the risk of costly non-compliance penalties.
The Main Types of ERP Pricing Models
The following are three primary ways your business can acquire an ERP system.2
Perpetual Licensing
Perpetual licensing is the only way ERP software was sold for decades. With perpetual licensing, your business pays a one-time upfront fee to purchase the software. Once the software is purchased, your company owns it outright and can use it indefinitely. However,
you are also responsible for maintaining the software, including any upgrades or updates. Perpetual licensing is a good option for your business if:
- You have the resources to invest in the software upfront
- You want to have complete control over the ERP software
Although the upfront costs might be expensive, over time the cost per user decreases as your business grows.
Subscription-Based Pricing
Subscription-based pricing is a newer way of selling ERP software. With subscriptionbased pricing, your business pays a monthly or annual fee to use the software. The fee includes access to the software, maintenance, upgrades and updates. Subscription-based pricing is a good option for your business if:
- You don't have the resources to invest in the software upfront
- You want to avoid the upfront cost
- You want to stay up-to-date with technology upgrades
- You want to avoid the responsibility of maintaining the software
With subscription-based pricing, your business has access to the latest features and upgrades as soon as they are released.
Usage-Based Pricing
Usage-based pricing is also another newer way of selling ERP software that is gaining popularity. With usage-based pricing, your business pays based on how much you use the software. The pricing is usually based on a per-user, per-month basis. The more users that use the software, the higher the cost. Usage-based pricing is a good option for your business if:
- You have a fluctuating number of users
- You experience a peak and off-peak season
- You want to avoid paying for unused software
Hidden Costs and Additional Considerations
A factor that most businesses overlook while implementing an ERP system is the hidden and additional costs. The following are some of these factors:
Hardware and Infrastructure
One of the often-overlooked aspects of ERP implementation is the need for appropriate hardware and infrastructure. While your organization may focus on the software and licensing costs, you must also consider the necessary investments in hardware to support the ERP system. This includes servers, storage devices, networking equipment, portable devices and other infrastructure components.
Ensuring that the existing infrastructure is capable of handling the increased workload that comes with an ERP system is critical. In some cases, upgrades or replacements may be necessary to ensure optimal performance. Failure to assess and address these hardware and infrastructure requirements can lead to unexpected costs and system inefficiencies down the line.
Data Migration
The successful implementation of an ERP system requires the migration of existing data from legacy systems or spreadsheets into the new system. Data migration is a complex and time-consuming process that often involves cleansing, mapping and transforming data to fi t the new system's structure. This process requires skilled resources and careful planning. Allocating sufficient time and resources for data migration is critical. Any errors or inconsistencies in the migrated data can have far-reaching consequences on the system's functionality and your organization's ability to operate smoothly. You must also consider the cost of data validation and potential need for data cleansing tools or services to ensure data accuracy.
Training and User Adoption
What use does any new advanced system have if the users it's designed for cannot use it effectively? Implementing a new system requires users to learn new processes and workflows, which can be a challenging endeavor. The lack of proper training and user adoption strategies can lead to low system utilization, decreased productivity and increased frustration among employees. Investing in comprehensive training programs is crucial to ensure that users are equipped with the necessary skills and knowledge to effectively utilize the ERP system. This includes training sessions, user manuals, online resources and ongoing support. Additionally, change management strategies should be implemented to promote user adoption and minimize resistance to change.
Integration with Third-Party Applications
ERP systems often need to integrate with various third-party applications to meet specifi c business requirements. These integrations can range from connecting with your existing customer relationship management (CRM) software to integrating with your suppliers' supply chain management (SCM) systems. However, these integrations can be complex and require additional investments in terms of time, effort and resources.
Therefore, carefully evaluate the need for third-party integrations, and consider the associated costs. This includes the costs of integration tools, development resources and ongoing maintenance. It is essential to assess the compatibility and scalability of the ERP system with the required third-party applications to ensure a seamless integration that supports business operations effectively.
Maintenance and Upgrades
ERP systems (besides most subscription-based, cloud deployed models) require continuous maintenance and periodic upgrades to ensure optimal performance and functionality. However, organizations often underestimate the costs and efforts involved in maintaining and upgrading ERP systems. These activities may include applying patches, resolving system issues, upgrading hardware components and staying up-todate with the latest software versions.
Therefore, factor in the cost of ongoing maintenance and upgrades when planning for your ERP implementation. This includes budgeting for IT resources, system monitoring tools and potential consultancy services.
Conclusion
Estimating the cost of ERP software requires careful consideration of various factors. These factors include business size, customization needs, deployment method and industry-specifi c requirements. By understanding the pricing models, hidden costs and industry considerations, your organization can make an informed decision and effectively budget for your ERP implementation.
It's crucial to conduct thorough research, consult with vendors and assess the specifi c needs of your business to arrive at an accurate estimate of ERP costs. Remember, ERP software is an investment that significantly enhances your business' operational efficiency and drives growth—when implemented strategically and within budget.
References
- Wood, L. (2023, January 27). How Much Does ERP Cost? Software Connect.
https://softwareconnect.com/erp/pricing/
- Hayes, K. (2023, August 11). How Much Does ERP Cost? | 2023 Software Selection Considerations.
https://www.selecthub.com/enterprise-resource-planning/erp-cost/
*Note: TCO ranges are approximations. Your total costs may vary.
About Ultra Consultants
Ultra Consultants is an independent ERP implementation partner. With many ERP solutions to choose from, you don't need to evaluate all of them in order to choose the right one. Our decades of experience will put you on the path to success in the shortest time possible. We also collaborate with your internal teams and external vendors to coordinate activities, resolve issues and manage risks effectively. For more information and additional resources on how to bring our expertise right to your doorstep, visit us at ultraconsultants.com.