During the three years to 2017, the price of ERP software has been falling at an estimated annualized rate of 0.4%. Even though demand for ERP software has been growing, prices have been falling due to increasing competition and shifting buyer preferences.
Price declines have come steadily as vendor competition has intensified and buyers have changed their preferences for ERP software delivery. An ERP software system provides buyers with a key competitive advantage, but its total cost of ownership is high, particularly when the provider is a well-established market leader, like Oracle or SAP. Consequently, new providers have been entering the market and capturing market share by offering low-priced or open source ERP software solutions, which buyers can use for free. At the same time, buyer preferences have shifted from the SaaP delivery model to SaaS deployments, which are typically less expensive. As a result of these changes, average market prices have fallen. Although suppliers still retain some pricing power in the ERP software market, the balance of power has shifted in favor of buyers. Consequently, buyer power has increased in the past three years.
Although competition has been driving market prices down in recent years, the rate at which prices have been falling has been slowed by increases in demand. This growth has been driven primarily by private investment in computers and software and the rising number of broadband connections. As businesses have invested more in automating back-office processes, demand for ERP software has risen. This technological investment has also included growth in broadband connections. As more businesses have invested in faster internet connections, they have become more likely to purchase SaaS solutions. As a result, demand for ERP software has risen. Finally, demand for ERP software has also grown in line with a rise in the number of businesses, which represents the potential customer base for market providers. This growth in demand has prompted market providers to limit price declines.
Nonetheless, in addition to falling prices, buyers in the ERP software market benefit from low price volatility. Low price volatility boosts buyer power by allowing buyers to budget for purchases more accurately. Because market prices are falling, buyers may benefit from delaying purchasing or signing service agreements.
Prices for ERP software are expected to continue falling at an annualized rate of 0.4% during the three years to 2020. IBISWorld projects that competition from low-cost and free providers in the market will continue to grow, pulling prices downward. However, the rate of price decline will be limited because demand is forecast to increase.
Despite the high market share concentration in the ERP software market, new providers are expected to continue initiating operations by offering low-cost solutions. Most importantly, the number of providers that offer open source ERP software without licensing fees is expected to increase. As these providers enter the market and begin competing with established vendors, average prices are projected to decline. Moreover, IBISWorld forecasts that buyer preferences will continue to shift in favor of SaaS delivery, leading to lower average costs than with SaaP delivery. This decline in average prices during the three years to 2020 will boost buyer power. As competition increases, providers may become more willing to negotiate on price.
Demand is expected to continue growing, however, pushed up by greater private investment in computers and software, a rise in the number of broadband connections and a higher number of businesses. Investment in computers and software, including ERP software, is expected to increase as businesses continue to automate their operations to cut costs and increase efficiency. As more companies invest in ERP software, demand will grow. At the same time, growth in the number of broadband connections will also push demand for market software upward, particularly SaaS licenses. Finally, growth in the number of businesses will mean that providers have a larger potential customer base, further driving demand upward. As demand increases, market providers will be encouraged to limit the extent to which they reduce the price of ERP software.
Price volatility is expected to remain low during the next three years. The rate at which prices are falling will remain steady, as market providers try to protect their profit margins while maintaining their competitiveness. Low price volatility will benefit buyer power by allowing buyers to budget effectively for their expenditures and take time to evaluate multiple vendors. With market prices expected to continue falling, buyers stand to benefit by delaying purchasing decisions until they have thoroughly evaluated providers.