How Much Does an ERP System Cost?

Introduction

Enterprise Resource Planning (ERP) systems have become an indispensable tool for businesses seeking to streamline their operations, enhance efficiency, and stay competitive in the modern market. However, before embarking on an ERP implementation journey, one of the most critical considerations is understanding the costs involved. You have been searching high and low to figure out how much one of these things really costs and probably found limited (if any) good information. In fact, just figuring out the different factors that go into the cost and the different models and pricing methods can be confusing since no two suppliers do it exactly the same way.

The purpose of this post is to demystify what goes into the cost of an ERP system, the magnitude of each piece, and point you to additional resources to help you better understand what each component of the cost is and the choices you will have to make as you go through the process of acquiring and implementing an ERP system. 

Much like buying a car, there are both one-time and recurring costs for an ERP system. Just as in the car buying process you have some control over what costs are one-time versus recurring (paying cash vs. financing), there are also some costs which you can’t easily reclassify. Let’s address the easy one first.

One-time costs of ERP Systems 

When it comes to one-time ERP system costs there are really only a few things that can truly fall into this category. It is also the category that is evolving (disappearing) as more and more providers move toward recurring revenue models. The items that can fit here are:  

1. Software licensing cost
2. Implementation cost
3. Cost for additional capabilities

Software Licenses

Traditionally (going back to the 1980s) in the ERP world you would buy perpetual licenses for your ERP system. This means you would license seats or users and “own” the rights to those seats or users forever. There were also recurring costs associated with that purchase in the form of annual maintenance fees (more on this later).

When Salesforce.com came on the scene, there began to be a shift, albeit a slow one, toward recurring licensing. While most modern ERP systems have made the transition to a subscription model for software licensing, there are still a very limited few which allow you to purchase perpetual licenses. These ERP systems are on premise systems - not cloud - and require you to then manage or hire someone to manage the software and its associated infrastructure (servers, network, storage systems, etc…).

Suffice it to say that most ERP providers are moving away from this model. Keep an eye out for our upcoming post with more information about the pros and cons of on-premise systems versus cloud systems.

If you find yourself in a situation where you desire perpetual licensing, you can expect to pay between $1,000 and $3,500 per user as an up-front cost.

Implementation

The other typical one-time cost associated with an ERP system is for your initial implementation. Right now, you may be thinking, do I really need implementation help? While that is not a topic for this post, please rest assured that we have an answer for you in an upcoming post.

The most common question that we get asked about ERP implementations is: “How much does an implementation cost?”. Well, we have an answer for you.

An ERP system implementation costs roughly the same as a new car.

Yeah, that’s not really helpful is it? But it is accurate and true. An ERP system implementation has a lot of variables just like a new car purchase. Do you want basic transportation or are you looking to drive a high-performance sports car off the lot? Do you want something from dealer inventory or do you want to personalize or customize your vehicle exactly to your liking? What features and accessories do you want on your vehicle?  

One of the problems with the ERP industry is a lack of standardization in implementations. Almost all ERP providers treat every implementation as a one-off! Yep, that’s right. It’s exactly why you cannot easily go to a website and see how much it will cost for an implementation.

By now you are probably thinking that ERP providers suck. Well, yes and no. A lot of this behavior is customer-driven, meaning that every customer thinks that they are unique. Sorry to break this to you, but what makes you unique is only a very small fraction of your business. The rest can and should be as standard and efficient as possible. We have much more to say about the topic in an upcoming post.

The bottom line, though, is that in the small to midsize business market you should expect to pay $15,000 to well into six figures for an ERP implementation, depending on the size, complexity, and amount of customization your business requires.

Additional Capabilities

The final category of one-time costs for your ERP system is additional capability that you acquire at some point down the road. These costs come into play when you do things like: 

• Integrate to another system
• Add new business entities
• Reconfigure your business (product lines, commission structures, etc…)
• Custom reporting and dashboards
• And many more…

It’s very difficult to give a range of cost for these activities as they are all very different in scope and complexity. They all very much depend on the ERP system and its ease of configurability and interoperability. Many ERP changes can be accomplished for under $1,000. However, if you do something like implement a Warehouse Management System and “need” customized capabilities, you can easily run into six figures again. 

One other item to note with regard to one-time costs. Some providers are now moving to a model whereby the implementation cost is included in the monthly subscription, meaning you may run into situations where there is actually zero up-front cost for your ERP system. This can also occur if you self-implement.

Recurring ERP System Costs 

It’s no secret that, like streaming services and Amazon purchases, everyone wants to get in on the recurring revenue game (we’re no different by the way). Ever since Marc Benioff brought Salesforce to the market, this has been the dream of technology companies everywhere.

The ERP industry is completely on that path as well. As discussed above, licensing is already well down this path and implementation is beginning to follow. There are other costs as well which have been around for a while such as support contracts. Let’s start with the items we discussed as one-time costs first.

Licenses as a Subscription

Licensing costs are greatly influenced by a few factors. These factors vary depending on the pricing model of the software publisher, but they usually consist of a combination of the following things:

• Number of users OR transaction volume 
• Modules being deployed
• Add-on products

Most software publishers and resellers greatly prefer the recurring revenue from software subscription agreements. For the consumer, the subscription model is more flexible long-term, but it is more costly than perpetual licensing.

In general, the break-even time for subscription licensing versus perpetual is 30 months or more. At first glance this seems incorrect, since you will find that ERP licensing is roughly $50 / user / month - $200+ / user / month versus $1,000 - $3,500 / user. In a consumption-based pricing model (more about this in a future post), you can expect to pay starting prices of $1,500 / month for the most basic instance (essentially a multi-user Quickbooks replacement on steroids) to a starting price of $6,000 / month for a moderately complex manufacturing platform.

However, your ERP subscription cost includes infrastructure costs which are quite significant when not done at scale. ERP subscriptions include servers, storage, memory, security done by experts, and up-time guarantees.

When you start to factor in all of the things you would need to do to create an environment as stable, secure, scalable, and recoverable as the one from a software publisher, the calculation of cloud subscription payback period is actually much more favorable than it seems on the surface.

Implementation as a Subscription

As with most things these days, implementation costs are undergoing a transition. It used to be that this was the biggest line item in an ERP purchase and that it occurred up front. However, things are starting to evolve here. Instead of an upfront Time and Materials or Fixed Fee engagement to help you implement your system, some providers are moving toward including implementation in the monthly subscription cost for the ERP system. The amount that is included can depend on a variety of factors including:  

• The ERP provider’s desired payback period
• The potential cost (and value) of downstream support
• The licensing subscription cost
• Assumptions about inflation and other economic factors

Support as a Subscription

Another category of ongoing ERP costs is support plans. Returning to our car analogy, your costs to own and operate your system don’t end with your licensing fee (which is equivalent to your purchase of a vehicle). Like your car, your ERP system will need regularly scheduled maintenance such as upgrades, implementation of additional capabilities, changes to business processes, training and education of new users, training and education on new software features, new integrations, and countless other possible changes to your system. Also like your car, you can have a factory-trained technician who works on many vehicles help you with this (your ERP consulting team), or you can handle these functions yourself (keep an eye out for our upcoming blog post on the pros and cons of supporting your ERP system on your own).

Each of these strategies has a different cost associated with it. For example, is your organization big enough to hire internal staff to provide basic support for your user community, or is it more cost effective to outsource this to an ERP provider that does this at scale for many customers? The cost for an internal resource will be at least $6,000 / month (depending on your market and needs). You will typically pay less than that for an ERP provider to handle the load that your user community generates for basic system support and training.  

A major factor in the cost of a support contract for an ERP system is the scope of work that your ERP provider will do for you. Subscriptions range from basic end-user support (login help, training, and bug fixes) all the way to a one-stop shop for everything you want to do. Even with the one-stop shop concept, the throughput you get from your provider may be limited unless you want to pay for a certain number of dedicated resources on a regular basis, in which case you should probably look at bringing that function in-house.

Total ERP System Cost

As you have probably guessed by now, it is a fairly complex process to determine the cost of an ERP system without gathering quite a bit of information about the scope and complexity of the business.

However, we don’t want you to read this far and not get an idea of what an ERP system would cost for you. While the numbers below aren’t exact, they are a reasonable estimate of the Total ERP System Cost for a variety of situations.

These costs DO NOT include potential annual or end-of-contract price increases which you are very likely to experience.

Financials Only - Single Entity

B2B Distribution

eCommerce

Manufacturing

Tips for Cost Optimization

Conducting a Thorough Needs Analysis: Know Thyself!

Before you jump into the ERP market, introspect and analyze your business's needs. Identifying the essentials will help you resist the temptation of unnecessary features that could inflate costs. 

Considering Total Cost of Ownership (TCO): Look Beyond the Sticker Price 

Think long-term! TCO includes not only upfront costs but also maintenance, upgrades, and support expenses. Evaluating TCO will help you make an informed decision. 

Emphasizing User Training and Adoption: Empower Your Team 

Conclusion

Remember, while it is important to understand the cost of an ERP system, cost should not be the sole determining factor of which system to purchase. The value an ERP system brings to a business in terms of process optimization, data-driven decision-making, and enhanced productivity can far outweigh the initial investment. A well-implemented and maintained ERP system can become a catalyst for growth and a competitive advantage in today's dynamic business landscape.