The Cost of an ERP (and the cost of not having one)

ERP can come with a serious price tag. For a small business owner used to paying for accounting software or a handful of separate programs, the cost can be hard to swallow.

So, why do ERPs cost so much?

In this article, we’ll break down what goes into the cost of an ERP, what you’re actually paying for during implementation, and how to weigh that investment against the costs your business is already carrying.

We’ll discuss:

• How much does an ERP cost?
• ERP Pricing Factors
• What's behind the implementation cost
• The Hidden Costs of Not Having an ERP
• How Having an ERP is Like Adding Employees
• The Bottom Line
  

How much does an ERP cost?

If you’re thinking about an ERP, one of your biggest questions is probably: how much does it cost?

The short answer

For most small and midsize businesses, ERP is a five-figure to low six-figure investment. The final cost depends on the size and complexity of your operation, how many people will use the system, how much data needs to come over, and how much help your team needs during implementation.

There are typically three layers of cost in an ERP investment:

• One-time implementation fee

• Ongoing subscription costs per user

• Time spent by the team learning the new software

This is the standard pricing model for most ERP systems. But there are a few factors that go into determining how much an ERP will cost for your company specifically.

How big is your company? How many users? How much data do you have? What do you need it to do? All this considered, ERP projects can fall into a range anywhere from five figures to the low six figures depending on the size and scope of the project.

That can be a big number for a small business. But part of understanding the cost is understanding what goes into the project, why one implementation costs more than another, and what you should expect to get in return.

Read also: Skip the $100,000 Software Carcass

Factors that Affect ERP Pricing

ERP prices fall into a broad range, depending on the business’ needs and complexity. For large manufacturers with a lot of data to track, pricing will be higher than for a small repair shop. Businesses just starting out that don’t have large data imports won’t need as much implementation time as the ones with years of customer and product data to import.

Here are some things that your vendor should ask about that can factor into the price of your ERP:

• Users – how many people need access?
• Data migration – how much data needs to be cleaned and imported? This includes everything from finances, to customer and vendor records, to individual inventory item details.
• Operational complexity – Do you have one location, or several? What’s your business model (distribution, manufacturing, service? A mix?) Do you have specific requirements like serialized item management or reverse manufacturing capabilities?
• Configuration and customization – Will you thrive in standard workflows, or does something need to be built to fit your unique processes?
• Modules and integrations – Do you need inventory management, payroll, ecommerce, payment processing, etc.? Do you need to connect to another piece of software?
• Implementation and training scope – How much process work and employee training is involved?

When you talk to an ERP consultant, they should be evaluating all of these areas so they can provide you with a proposal that reflects what you need, without a lot of features you don’t.

So, what exactly are you paying for in an ERP implementation?

The implementation fee can be one of the hardest parts of an ERP quote to understand.

But ERP implementation is much more than installing software and handing your team a login. Taking the way your business currently handles inventory, sales, purchasing, accounting, production, service, and other day-to-day work and moving those processes into one system requires planning, expertise, and close collaboration between your team and your ERP provider.

A good ERP partner should help you through several important parts of that transition:

• Understanding how your business works. Your implementation team needs to understand how work actually moves through your company. How do you receive inventory? How are orders entered and fulfilled? How do you price products? How does information get from the shop or warehouse into your financials? A good implementation partner helps uncover the processes, exceptions, and workarounds that your new ERP needs to account for.
  
  
• Deciding how those processes should work in the ERP. The goal is not to recreate everything exactly as you do it today. Some processes may need to change. Some manual steps may no longer be necessary. Your ERP partner should help you determine where the software can support your existing workflow and where there may be a better way to accomplish the same goal.
  
  
• Preparing and moving your data. Customer records, vendors, inventory items, pricing, open orders, accounting information, and other data often need to be cleaned up, organized, and transferred from your current systems. The amount and condition of that data can have a major impact on implementation cost because moving years of business information accurately takes time.
  
  
• Configuring the ERP for your business. Your chart of accounts, inventory structure, pricing methods, user permissions, locations, workflows, reports, and other settings all need to be established. For more complex businesses, this can also include manufacturing processes, serialized equipment, multiple warehouses, service workflows, integrations, or other specialized needs.
  
  
• Training your team. Even the best ERP will not provide much value if your employees do not know how to use it. Implementation should include time for the people who will actually work in the system to learn their new processes, ask questions, and become comfortable using the software in their day-to-day roles.
  
  
• Testing before you go live. Before your old processes are replaced, your team and implementation partner need to make sure orders, inventory movements, invoices, accounting entries, and other critical workflows behave the way they should. Catching problems during testing is much easier than discovering them after go-live.
  
  
• Supporting the transition. Going live with an ERP is a significant change for a small business. Questions will come up, employees will need help, and some processes may need adjustment once they are being used in the real world. A strong ERP partner stays involved through that transition rather than disappearing once the software has been installed.

Read also: How the right support makes ERP implementation less daunting – Keener Electric’s story

Choosing the ERP vendor that has the smaller implementation fee is not necessarily a better investment if your team is left to figure out the difficult parts on its own. The goal should be to come out of implementation with more than a functioning ERP. You should have clearer processes, employees who know how to use the system, and a partner who understands your business well enough to continue helping as your needs change.

The Hidden Costs of not having an ERP

ERP is a serious investment, yes. But for businesses that need ERP, not having it is likely more expensive. When the core operations of your business each run from a different source of truth, you’ll see costs in four primary places:

1. Inventory & Resources.

If $300,000 of inventory is sitting on your shelves and you can’t confidently tell what’s moving, how much working capital is tied up unnecessarily? How much will eventually need to be written off?

Inventory carrying costs, which include storage, insurance, shrinkage, and the cost of the cash itself, are commonly estimated at 20-30% of inventory value per year. On $300,000 of inventory, that's roughly $60,000 to $90,000 a year just to hold it. Even a modest reduction in excess stock would free up thousands in working capital. 

2. Employee Time.

Data entry, correcting errors, reconciling information, and managing multiple systems all consume labor. Most owners underestimate how much.

Run the numbers

Three employees each spending five hours a week on double entry and reconciliation. That's 750 hours a year. At $30/hr, you're looking at $22,500 annually. 

3. Missed opportunity.

Bad or disconnected data doesn’t just affect reporting. It slows down leadership decision-making. If your financial reports don’t match what’s happening operationally, what decisions are you delaying because you don’t trust the numbers?

4. Key-person risk

In many small businesses, there's one person who knows how all the spreadsheets fit together. When that person is out sick, on vacation, or moves on, the business feels it immediately. An ERP puts that knowledge into a system that your whole team can use. 

4. Burnout and turnover.

Constantly fixing mistakes and entering the same data over and over again is a quick way to burn out your employees. By reducing administrative load, you make room for value-added work that is more enjoyable for your employees (and more beneficial for your customers and your bottom line).

These costs rarely show up as a line on a spreadsheet, but they add up. And without a system to manage your operations, they're very hard to avoid. 

With ERP, you’re buying back time.

Think of the ERP as one or more additional employees. If you were going to try to do all these business management tasks without an ERP, you'd have to pay at least one person to do them—or do them yourself.

Berlin Seeds, an Ohio seed company, reduced order-entry time from 10 days to 48 hours after implementing ERP, with the exact same number of employees. For them, that added capacity was equivalent to hiring two or three additional team members. Read More >

That comparison matters when you weigh the price. Two to three new hires would be a cost you pay every year in wages, benefits, and training. Most of an ERP investment is paid up front, and the capacity it creates keeps working for you year after year. 

The Bottom Line

An ERP is a significant investment. But the number on the proposal is only one side of the equation. The other is what your current way of operating is already costing you in time, working capital, accuracy, and capacity. Understanding both gives you a much clearer picture of whether the investment makes sense for your business.