In the past couple decades, businesses have increasingly woken up to the extraordinary benefits of ERP software – particularly since it moved to the cloud. But what does ERP cost for an SME?
On average SMEs should expect the monthly, per-user cost of cloud-based ERP to be US$114. On top of that, a one-time implementation budget of $10,000-$150,000 is often required, as well as six months to two years of roll-out time.
Keep reading to learn more about how the costs of ERP break down, what ERP could do for you, and whether there are more cost-effective alternatives (hint: you're on their website).
- View now: Small Business Inventory Software
Quick recap: What is ERP?
Enterprise Resource Planning (ERP) is a type of modular software suite designed to interconnect business systems so that they can be used and managed from a central dashboard. ERP improves data sharing between departments, allowing leaders to see how different areas of business impact one another – and greatly streamlines processes.
All critical business systems can be integrated by ERP, from payroll and HR to inventory management, customer relationship management, purchasing, sales, shipping and more.
Types of ERP
There are three main types (or deployment models) of ERP:
- On-premise ERP
- Cloud ERP
- Hybrid ERP
The difference here is quite self explanatory. On-prem ERP systems are hosted on a company’s own servers, and are managed and supported by the company’s own IT staff. Cloud-based ERP is provided on a SaaS model, where it is the vendor who hosts all the hardware and customers access it via the internet. In a hybrid ERP model, deployment varies. Some elements will be hosted on-site, others via the cloud.
Our article today is primarily for SMEs, and we’ll be talking exclusively about cloud-based ERP.
Per-user license fees make up a big part of the ongoing costs of ERP.
Common features of cloud-based ERP
- Bookkeeping, invoicing, budgeting, and related accounting tasks.
- HR, including onboarding and payroll.
- Supply chain management.
- Inventory management.
- Forecasting.
- Customer pipeline mapping and visibility.
- Sales and customer relationship management.
- Integration of disparate data silos.
- Process automation.
- Big data analysis and reporting.
Learn more: ERP vs MRP Systems – What's the Difference?
Average licencing costs for ERP software
Using data from Capterra, we crunched the average starting cost (converted to USD) of 313 different ERP providers.
Different providers offer different fee structures, so we’ve given the average of each. For SaaS vendors the most common is a monthly or annual subscription. As mentioned, our article will focus on cloud ERP below, but here we’ve included the average one-time “perpetual licence” fee (often charged for an on-premise software package) so you can see how it compares.
Finally, remember that these are starting costs for just the licence - not total costs. Other costs will occur (see below), and licensing fees may increase based on individual circumstance.
- Average starting monthly cost of cloud ERP (per user): $114
- Average starting one-time cost of on-prem ERP: $14,490
Other ERP licensing need-to-knows
Named user licences
Some licences are called ‘named user licences’. This is where users are signed up specifically, by name, to the system. It is an exclusive right for that one individual to use the software. Named users are not allowed to share their login.
You may find that you are asked to sign your users up as named individuals, but that the per-user fee changes based on their expected usage of the system. Intensive users may cost more, while less-intensive users cost less.
Concurrent licences
With a concurrent licence, a set number of users are allowed to use the system at any given moment. You can have any number of users signed up to the software, but only the specific number may log in at one time.
Named user licences are usually less expensive than concurrent licences, but may be too restrictive for certain business types (such as shift-based work).
Installing and configuring an ERP attracts one-off costs.
Factors that influence the cost of cloud ERP
- The complexity of your specific needs, related to your industry or regulatory environment.
- The number of user licences required.
- The number of modules/features required.
- The number of company locations connecting to the system.
- Any customisations.
- Third-party integrations, if not pre-packaged with the subscription.
- Business readiness costs, such as:
- Whether your internal processes are optimised for new software.
- Training.
- Internal system configurations. - How much of a deal you can negotiate.
ERP cost breakdown: What else affects the cost of ERP?
Implementation costs
Implementing ERP involves more than just buying software. Other costs include:
- Wages for ERP project implementation staff.
- Cost of an outsourced implementation partner, if required.
- Change management.
- Training.
- Data migration.
- Any new hardware (i.e. staff laptops, mobile devices, barcode scanners).
- Testing and optimisation.
- Vendor support or maintenance fees where applicable.
Individually, these costs are hard to average out because they are very specific to both the organisation and the software vendor’s pricing model. As a rule of thumb, however, the larger or more complex your organisation, the more expensive your ERP roll-out will be.
To give you a sense of what ERP implementation costs involve, we sourced three separate quotes:
- ERP expert Gene Hammons gives a broad average price on ERP implementation for a SME of USD $10,000 to $50,000 - depending on the scale of your business.
- ERP solutions company Clients First suggests implementation can cost USD $10,000 to $150,000 for small businesses, or as high as $700,000 for particularly complex medium-sized businesses. Additionally, its experts advise that businesses should expect 40-60% of the budget to go to HR related costs.
- For a more specific example, a reputable UK-based implementation house that we spoke to quoted USD $17,000 - $89,000 to implement or upgrade to Sage 200. Again, these figures do not cover licensing fees – just the implementation and set-up.
While your ERP vendor is responsible for the security of their software, you will need to ensure the security of your own devices and network.
Minimum commitment
Many ERP providers require customers to purchase a minimum commitment of either a certain amount of time or a certain number of users.
Commonly you will see the minimum user count as 10. A typical minimum time commitment is one year.
These commitments are more common for on-prem systems than cloud-based licensing models, however they do still appear in SaaS contracts so you’ll need to be on the lookout.
Potential unforeseen costs
You will usually be made aware of the specific costs involved with any ERP deployment, relating to licensing fees and per-user/per-feature charges. But, some costs may surprise you as you sign the contract and proceed with deployment. These include:
- Support fees: Some vendors only offer a very basic level of customer support to lower-paying customers. To access a better level of support, you may need to upgrade your subscription. This fee can range as high as an extra 10-20%.
- Outside help: You might find that you can’t go it alone when it comes to migrating to ERP. In this case you would need to seek an outside consultant, which Clients First estimates could cost around $175-$225 per hour.
- Price increases: Depending on your negotiated contract or the vendor’s terms & conditions, you may find the subscription fee increases anywhere from 3-10% at the point of annual renewal. This, however, may be negotiable.
- Security: As with any SaaS vendor, it’s up to the ERP provider to ensure their product is fit for purpose regarding cyber security. However, all cloud software is to a degree a shared responsibility - you will be responsible for endpoint protection, as well as identity and access management. Put more plainly: you still need to protect your own devices, network and login credentials.
- Add-on modules and integrations: At the point of negotiation you must ensure you’re getting all of the integrations and modules you need. If you assume things rather than confirm, you may travel halfway down the deployment roadmap before realising that you can’t integrate a key system because it isn’t included as a part of your subscription level.
It is recommended that you add an additional 10% to your ERP deployment budget to account for these unexpected contingencies.
Non-monetary costs (i.e. cost consequences of ERP migration)
Two other factors add to the total cost of migrating to cloud ERP. Although, we’d note that these aren’t costs which are exclusive to ERP specifically, but rather a component of all new business investments that require fundamental change.
These costs, according to SelectHub, are:
- Loss of time: It takes six months to two years to complete a deployment of ERP (the larger or more complex the organisation, the longer it can take).
- Loss of productivity: During this implementation cycle, productivity may take a hit and therefore temporarily impact the bottom line. Staff must take time out of their day to learn the new system, which includes both time for training sessions and a general slow-down as they come to terms with the new platform.
Of course, the idea is to make these losses back through the productivity gains of the ERP system over time.
For most SMEs, a combination of best-of-breed software tools will be more cost-effective than a single ERP system.
Cost-effective alternatives to ERP (for SMEs)
ERPs are regarded as ‘does it all’ systems. This has huge benefits for larger or more complex businesses who need a single system that handles everything. However, many SMEs find ERP software too big for their more simple needs – making the price tag not worth it.
Cost-effective ERP alternatives are usually industry- or feature-specific toolsets. These smaller pieces of software have a much more focused function, doing their job exceedingly well without being as broad in scope as full ERP.
As an SME, you may find that if you don’t need the full ERP platform, you could look at purchasing a few smaller subscriptions to get all the features you need, and none that you don’t.
Examples of ERP alternatives include:
- Financial and accounting software: Software designed to automate the bookkeeping, invoicing, reconciling, payroll, and profit/loss functions of the business.
- ERP inventory management system: A central dashboard covering all aspects of inventory, from purchasing to sales, stock levels, warehousing and right through to shipping & handling.
- Customer relationship management: CRM software is for sales, marketing and customer service teams, tracking information related to customers. This information includes purchase histories, order statues, outstanding issues, and marketing-relevant info, like which mailing lists they’re engaged with.
Hint: If you go down this path, you still need to look for integrations
One of ERP’s big value propositions is that it brings disparate data together, helping systems communicate and enabling evidence-based decision making.
If you invest in a few tools instead of one big suite, you still need that level of integration. This is one thing you’ll have to check and recheck during the sales process, to ensure that any software you bring on board can readily integrate with the software you already have.
You’ll find quite a few tools come pre-integrated, which can cut costs
Making life easier is the fact that many smaller software vendors have partnered to pre-integrate their systems. This means that when you buy both, you’ll know they’re already connected. You may even find you only need to buy one, and that other integrations come as a part of the package.
For example, Xero and Unleashed are already built to work together. If you utilise both, you’ll have an interconnected system that links accounting, purchasing, production, inventory and sales management.
For many SMEs this combined functionality will cover the core of what you’d need from a full ERP system.
- Learn more: Sage ERP vs. Xero + Unleashed
What does Unleashed plus Xero cost?
The combined cost of Xero plus Unleashed comes in at USD $710 per month for 8 Unleashed licenses, giving a total per-user monthly outlay of $88.
Additional costs from Unleashed include a one-off onboarding fee of USD $789, and a recommended annual support fee of USD $869.
Overall, combining systems such as Unleashed and Xero, plus other best-of-breed solutions, will give SMEs a much more cost-effective software stack.
