CXO

Oracle drops prices and pushes online sales

This reprint from the Summit Strategies newsletter, <I>SummitVision</I>, examines how Oracle is adjusting to the Internet by trying to shift 80 percent of its sales volume to its online store this year.




For proof of the Internet’s ability to drive companies to undergo dramatic changes, look no further than Oracle. The big database vendor is in the midst of transforming itself into a prototypical “e-business.”

The latest step in this process occurred in mid-December, when Oracle announced new standardized pricing and licensing models for its Oracle 8i database and for associated product support services. Underlying the announcement was one of the vendor’s key strategic objectives: an effort to shift 80 percent of its sales volume to its online Oracle Store during the course of this year.
Summit Strategies, Inc. is a forward-thinking market strategy, research, and consulting firm for information technology and communications vendors. Its core focus is in the areas of business-to-business application hosting and e-business, Internet portals/marketplaces, and wireless technologies. This article originally appeared in the January 2000 edition of the SummitVision newsletter.
That’s an incredibly ambitious objective for a company so heavily dependent on its 2,200-person direct sales force, and known as one of the industry’s biggest wheelers and dealers when it comes to contract negotiations. Furthermore, Oracle has long carried a stigma as a high-cost provider—even though its sales team has been known to practically give away products to win some key ac-counts.

Pricey reputation and aggressive sales tactics notwithstanding, Oracle has been doing quite nicely, thank you. For its second fiscal quarter, ended November 30, the company reported earnings of $384 million (up 40 percent from the previous year’s second quarter) on overall revenues of $2.3 billion.

Why tinker with what seems to be a winning formula? In Oracle’s opinion, it simply has no choice.

Its old selling model carries too much overhead and too many negatives to be sustainable in the emerging Web-based software marketplace, the company believes. That new marketplace requires published price lists and standard contracts, and the resulting ability to conduct online software purchases with ease.

As we begin 2000, Oracle is already well along the path toward adopting such a Web-based sales model. Visitors to the Oracle Store—just launched in September—will find they can price and purchase the standard and enterprise versions of the Oracle 8i database as well as the various modules of Oracle’s enterprise resource planning (ERP) and customer resource management (CRM) applications.

The online store itself is also getting top billing on the oracle.com home page (at least it was, as we went to publication). Oracle executives admit that its current corporate Web site, like most of its type, positions shopping as just one of the many available services. Increasingly, Oracle says, its corporate site will become first and foremost a selling site, with other site elements playing second fiddle to the Oracle Store.

As part of its new, standardized, database pricing announcement, Oracle introduced several price cuts and new licensing models. They include:
  • The introduction of “named-user” pricing for both single-server-based and multiple-server-based deployments of Oracle software (the named-user options join Oracle’s existing “power unit” licensing option)
  • Up to a 50-percent reduction in the cost of the power-unit licensing model, from $200 to $100 per power unit in the case of Intel-based Oracle 8i Enterprise Edition sales, for instance (A power unit equals 1 megahertz of processing power, so a system with two 400-MHz processors would equal 800 power units; deploying Oracle 8i Enterprise Edition on that system would require a perpetual licensing fee of $80,000, if the customer chose the power unit licensing option.)
  • The introduction of four-year and two-year term licenses for all products at 60 percent and 35 percent of the product’s perpetual license list price, respectively
  • The introduction of standardized discount levels based on sales volumes
  • The availability of support subscription services for upgrades and updates across all products, priced at 15 percent of the software’s list license fee

By reducing, standardizing, and publishing its prices, Oracle has declared its intention to level the playing field—at least for customers purchasing up to $500,000 of its products. At higher levels, at least for now, Oracle’s direct sales force will still take the lead and will be free to negotiate prices as in the past.

But by also pushing its software via the Oracle Store, the company hopes to be considered by small and midsize business (SMB) buyers, which its direct sales force can’t afford to reach. SMB buyers have been leery of Oracle in the past, in large part because of its products’ high prices, and have gravitated toward more competitively priced databases, particularly Microsoft’s SQL Server.

“Our goal [with Oracle Store] is to expand sales capacity,” says one Oracle executive. “Most of the sales we lose, we lose because we’re not there.”

As for its goal of driving 80 percent of its sales to its electronic store, Oracle points out that many of those sales will be “assisted” sales, consisting of orders actually placed by its own tele-sales and direct sales staffers on behalf of customers.

Even Oracle’s sales partners, which have had their own “Oracle Source” sys-tem for placing customer orders, will be moved to the standard Oracle Store sales site. This will allow integrated selling across all channels, meaning that both Oracle and its sales partners will be working with the same information and the same price list.

Having standard pricing and uniform contracts to work with should shorten sales cycles and boost sales productivity, Oracle believes (in combination with tight storefront integration with Oracle’s internal ERP and CRM applications). The company estimates that a 15 percent improvement in its sales productivity would translate into a $78 million savings in sales personnel expenses over the course of a year.

Oracle’s bold push to Web-based sales does have risks associated with it, however. Not the least of these is navigating the wrenching shift from a secretive, even arbitrary, pricing model to one open for public consumption—including by competitors. But the new license fees and models show Oracle is serious about pressing its conversion into an e-business, even if it has to slay some Oracle sacred cows in the process.

We believe Oracle will emerge from its transformation even more competitive than it is today, and better able to survive in a Web-centric world.

Dwight Davis has reported on progressions and strategies in all segments of the IT industry for more than 20 years. His broad scope of industry knowledge and his well-established relationships with industry executives define him as a consistently reliable source for accurate and intuitive analyses.

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All information published in Summit Strategies materials or on our Web site is proprietary information that is protected by United States and international copyright law and conventions. Direct or indirect reproduction is prohibited without Summit Strategies' written permission. Summit Strategies, Inc. © 2000.

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