LMS Setup Fees: For some vendors it’s a cash cow

The other day I walked into my bank. I was informed of this new product which would meet my needs. The pricing was doable especially for the features. Everything seemed in alignment. I was already to sign, when I inquired about any additional fees.  What initially was a great deal turned into a clear revenue generator on behalf of the bank. I expected some fees but the “one time” setup was at best a slap in the face and at worst – a double slap in the face.

So what did I do? Slap back? No, I declined politely and then wrote about it on my blog (as in today’s blog).

If you have ever encountered the “one time” bank setup fee you know what I’m talking about.  Do they really need to charge that amount? I seriously doubt it.

Just as a seriously doubt many of the LMS vendors who feel it is their duty to charge one time setup fees that break your budget bank.

A brief history

LMS setup fees are as common as bad service.  They have been around from the beginning of the LMS world.  At one time they are were all about implementation, since in the early years, 90%+ of implementations were on the client’s servers. There were also setup fees for those pioneers who offered a hosted service – which we now call SaaS or “in the cloud”.

That isn’t to say that everyone charged a setup fee, but rather, the overwhelming majority did. Why could they get away with it?

• Implementation, training, project management and support were common components of a client side server LMS – and huge revenue generators. And yes, they still are profit makers.
• Tech explosion. The late 90’s through 2002 were the heyday of the dot.com era (actually I would say the late 90s to late 2000, were truly the high point before the wheels started to come off).  With that came companies who knew you could score high profit margins for something people needed – implementation, etc.
• Limited number of choices. Lower number of choices, more opportunities to charge higher setup fees.

Setup Fees for a LMS- What is realistic?

There are plenty of vendors who do not charge any type of setup fee. No implementation, training and/or support fees. Nor charge for skins, maintenance, updates and project management hours and yet they are still profitable.

Equally there are vendors who charge a setup fee for items that you need to make it go.  What is acceptable to pay?

• $4,000 to $7,000 for a SaaS LMS. Includes training, basic level of support (most likely e-mail or limited phone hours), implementation, PM (if needed), skins/branding (if it is a multi-tenant, then just for the “parent” i.e. main tenant. Then each additional tenant there is an additional charge for skins), maintenance and all updates during the length of your contract.
• For a client side hosted LMS (i.e. it sits on your own servers), up to $25,000. Includes all the above components and may also include higher tier of support and a base set of project management hours. Also having an implementation team or at least one person come to your location and set everything up. You can buy extra training – on site for x number of days – which can be a major profit maker for a vendor.

What some vendors toss into their setup fees to boost the price

• Data migration. I’m sorry but if you have less than 1,000 users there should be no data migration costs.  1,0001 to 5,000 – minimal charge.  The only reason you should jack up the numbers is if there are more than 20,000 users and even then it shouldn’t cost more than the Hope diamond.  So, what is reasonable for that high cost? 50,000 or more users. Better yet? Offer data migration for higher number of users as a separate cost.
• Time to do the data migration. I always laugh at vendors who tell clients that it will take 100+ hours to move the data over from one LMS to another. I know of a couple of vendors who use the data migration as a tool to retain their clients, by telling them that the hassle of doing this is not worth them switching.

Look if you can download a .db file or .cvs file with the end users and the standard data most folks want, and do so in a short amount of time, then how can you honestly sit there in any serious manner and tell someone it will take two weeks to move over the data.  If I can download 500 users with their sets of data in less than 30 minutes, why does it take you five hours?

• Branding/Skinning, e-commerce setup and some other bogus items – If you tell the customer that the platform comes with branding/skinning then don’t charge for it. Either it comes with it or not. And when you say “comes with it” it means free. 

That is like saying that the new car you are leasing comes with a “iPod adapter”. It either has it included or not.  You wouldn’t stand there and say nothing if the salesperson told you “yeah it comes with it, but it will cost you $500 more”.

• Project management hours. One of the greatest ways to make dollars with a Cheshire grin on your face. You have hired these folks right? Given them a salary and benefits? You already have done a cost analysis – otherwise you shouldn’t be in business.  You can easily shove that cost into the cost of your LMS without that additional fee for PM hours.
• APIs – the first one should be free, after that minimal charge and listed as an extra charge – how much? $300-$750 per API. I know of vendors who charge 3K per API.
  

A little secret – there are vendors who have seen X number of APIs so often Or due to another customer already have the API available and ready to go, who will still charge the customer to add it to the platform. Why don’t you just shove a rock into my car tailpipe while you are at it?

• Maintenance and updates for the length of the contract.  When you buy software and even devices that connect to the Internet, updates are included at no additional charge. If you bought a Blu-Ray would you be fine with paying extra for updates? Heck no, you would be furious.  So, why should you do the same thing to your LMS customers? Updates at no charge are standards in the consumer marketplace.

When you buy a BMW, Toyota, Ford and nearly the majority of car manufactures, maintenance is included for three years, which is usually the common number of years people lease.

Before you say, you get a maintenance, warranty etc. if you buy the car – you are correct.  But leasing is what you actually do when you “buy” your LMS.

What is usually not included in those setup fees

• Any real customization – and honestly it should be a separate cost. If you expect a complete overhaul you shouldn’t expect it to be part of your setup fee
• Interface to a HRIS, ERP, etc. – If the client is considering an interface but has not yet decided  OR if the system you are connecting too (i.e. ERP, HRIS, CRM etc.) requires a lot of PM hours, and thus requires a lot of scoping- then it should be a separate cost; if the client has said they need an interface and you advertise that you can interface with the other system and have vast experience in doing so – then a minimal charge.

Trend – Increased Setup Fees

First off, I want to tell you there are a lot of vendors who do not charge any setup of fee – and if I was them – I would shout it out everywhere I could. It is great marketing and advertising. 

Equally there are vendors who charge within the realistic boundaries of one time setup fees. Could they drop it to zero and offset elsewhere or offer it as extras? Absolutely.

But what I am seeing and what really irritates me are the increasing number of LMS vendors who are increasing their one time setup fees. 

I am talking a serious number of vendors who previously had lower setup fees. Despite a still shaky global economy, they clearly have blinders on and feel it is acceptable to do so because they feel that they are the Rolls Royce of LMSs.

If you are, then I want champagne and season tickets to the Dodgers for the next three years.

How bad is it out there?

• One vendor charges more than their LMS for 2,000 users.  Let me say that again – their one time setup fee for 2,000 users is more than the cost of the LMS for that year
• A few vendors have zero problem charging over 60K and up for one time set up fees – and they think they are doing you a favor
• There are a few vendors whose one time setup fees are at least half of the total cost of the LMS platform (and in some cases 65% to 75%)- due to the number of users – so, let’s say you have 2,000 users, and their system is 30K for those 2,000 users. Well, their one time setup fee is 22K.

What I can’t understand

Why can’t the vendor charge the same one time setup fee regardless of the number of users?  Thankfully there are a majority who follow that premise, but there a nice chunk who don’t.

 I also have an issue where you feel like you get penalized because you have a lower number of users, but the vendor’s one time setup fee is so close to the initial number of users that it goes from price affordable to price unattainable (see third bullet point above).

Bottom Line

Everyone you talk to today hates those irritating bank fees. They charge you more if you use an ATM that is not their ATM. They charge you more if you do not have a savings and checking account. They charge you more for having a debit card (which also some stores do as well, if you use a debit card).

As a business, they charge you a one-time setup fee for your terminal – even it you are selling only online. They charge you a one time setup fee for X, Y and Z services that you need to grow your business.  They charge you a one time setup fee for this and that, and don’t even offer you a coffee mug or at least a thank you card in the mail.

My preferences

• I’d prefer vendors who do not charge any setup fees

• I’d prefer vendors who if they decide to charge setup fees for a SaaS LMS they do so in a realistic and common sense manner, without adding mark ups that you find at furniture stores

And if you can’t do that, then give me my lame toaster.

At least that way, I can think of you every time I burn my toast.

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