SAP is raising its standard support maintenance rates from 18 percent to 19 percent, but the numbers don't quite add up unless the company plans to increase prices annually.
The math behind SAP's maintenance pricing just doesn't make sense. Consider the move from 18 percent to 19 percent:
- SAP risks annoying customers;
- SAP risks pulling business from the second half into the first half since the price increases start July 15.
- And the payoff from the new maintenance rates make you wonder why SAP is even bothering.
Cowen & Co. analyst Peter Goldmacher estimates that SAP will get less than €10 million in revenue and a max of €0.005 in earnings per share. In that light, SAP's move makes absolutely no sense. The company may irk customers for what amounts to a rounding error for SAP.
Goldmacher said in a report:
We believe this price hike is a small short term positive for SAP. Maintenance is an extremely high margin product and any increase in price drops virtually straight to the bottom line. Longer term, we view the hike as a negative for the company because customers aren’t getting any incremental benefits despite the higher price tag, and this price hike is sure to fan the growing flames of discontent.
Why would SAP bother with a price hike and minimal ROI? The only way this makes sense is if SAP plans to make price increases an annual tradition. SAP has already proven that it doesn't have a ton of pricing power. It tried to raise support rates before and got slapped down by customers.
Given SAP's predicament it appears that the company is going with an incremental boil the frog approach. Yes, IT buyer you're the frog. What's a degree here and there every year?
The big question is whether customers will notice this increase and potential ones down the line. A 1 percent standard support price hike may not spur customers to run to Rimini Street. My hunch is SAP may test this axiom out annually. If this pricing strategy works for SAP it's a great trick. The problem is that great tricks work well---until they suddenly don't.