How to negotiate your Magento 2 licence without pulling your hairs out! – Magento Commerce, Cloud, Open Source and K-Hosting

Are you considering upgrading, migrating or renewing your license for Magento 2 Commerce (AKA Enterprise Edition)?
Are you concerned that the Magento price will skyrocket?
Maybe you received a quote, which increased your licensing cost significantly?
Has your Magento Sales Rep told you the license cost is the same with or without their cloud hosting?
Are you concerned about the commitment to a three year contract with upfront payment?

You are not alone; these are valid concerns shared by many merchants.

Let’s start with an axiom, “Everything is negotiable”.

Please bear with me as I try to set the context to understand where Magento and retailers stand. If you don’t have time, jump straight here:

How to make sense of Magento and Adobe Commerce Strategy?

Background

In the period between spinning-off from eBay in July 2015 and the acquisition by Adobe in June 2018, Magento was under the influence of their new owners, Private Equity groups Permira and Hillhouse Capital. Their primary objective was to increase Magento’s valuation. How? Obviously, by increasing revenue, but most importantly, by increasing the right type of revenue that attracts higher multiples. Cloud and SaaS companies demand high multiples, and they are also a more attractive acquisition target. That’s a key reason Magento hurried to assemble a few third parties and roll-out Magento Cloud Edition so that they could formulate a new “cloud” narrative and better fend off the momentum gained by Salesforce Commerce (formerly Demandware) and Shopify Plus. SaaS / Cloud businesses are 2.0-3.5 times more valuable than on-premise license software firms. At the time of the acquisition by Adobe, Magento had achieved a 10x revenue multiple (See Dries Buytaert’s thoughts about the acquisition).

Current state

Now that Magento is an Adobe company, it will have to align with Adobe’s “Experience Cloud” strategy – consider that Magento’s revenue currently represents approximately 1.5% of Adobe’s revenue. It is no secret that Adobe’s preferred delivery method for products is on its cloud (you can read more about how in 2.5 years, Adobe has transformed its business from a software license business into a SaaS business).
Adobe is one of the largest Amazon Web Services (AWS) clients, but in 2016, Adobe and Microsoft announced a strategic partnership, whereas Adobe will be using Azure for all Adobe cloud applications going forward. This partnership not only will help Microsoft catch up faster with AWS (in the distant future), but it sets the scene for one of the most significant tech acquisitions in history, considering that Adobe’s market cap is currently $136 billion, while Microsoft is close to 1 trillion, with $130 billion cash on hand (and that Microsoft CEO Satya Nadella and Adobe CEO Shantanu Narayen are old college buddies). Hence, why Magento subtly announced the support of Microsoft Azure during this year’s Magento Imagine.

Magento Open Source, Magento Commerce and Adobe Commerce Cloud

Adobe was swift to announce “Adobe Commerce Cloud” in March 2019, a bundle based on Magento Commerce Cloud, alongside Adobe Analytics Cloud, Adobe Marketing Cloud and Adobe Advertising Cloud. In that way, Adobe can provide an eCommerce solution to its enterprise clients, without meddling with the Magento SMB/SME market. Be under no illusion that it is just a matter of time and Adobe will try to find a way to make the bundle affordable to the SMBs/SMEs. Adobe’s Fortune 500 market is saturating; it will need a new market to create new revenue streams.

The license for Magento Commerce is available for On-Premise and Cloud. The cloud option is still running on the solution Magento cobbled together with platform.sh – initially referred to as “Magento Enterprise Cloud Edition”.

Adobe Commerce Cloud, as the name implies, is available on their cloud; it uses Magento Commerce Cloud, which runs on platform.sh, for Magento, and Adobe’s cloud hosting for the Adobe solutions. Adobe Managed Services is the Adobe entity managing Adobe cloud solutions. It’s not clear yet whether for the time being Adobe will be running Magento + platform.sh on AWS or Azure. Remember that Adobe has a (meaningful) strategic partnership with Azure; therefore, they will want to run Magento on Azure, alongside the other Adobe products. Since Adobe considers their cloud platform on Azure strategic, will Adobe acquire platform.sh? Or is platform.sh a stop-gap solution, until Adobe build their own Azure-based Magento Cloud Hosting? If so, will this new managed cloud hosting be rolled-out to Magento Commerce Cloud as well? Here are a few hints:

“in the second half of this year, Adobe will begin engineering work to take the front end and back end to cloud-native services, to enable true auto-scaling… This two-tier architecture allows you to horizontally scale on the front end, and it allows you to vertically scale on the back end”

This announcement inadvertently states what we knew already; Magento Cloud was out of date from the outset – for instance it never really auto-scaled.

Regarding Magento Open Source, Adobe pledged their commitment to continue the Open Source effort.

Problem: the cost of a Magento 2 site is rising

Both the licensing cost of Magento Commerce and the cost of building and migrating to a Magento 2 site, have significantly increased. I’ve heard from several European online retailers that the cost of the Magento license has risen between 5 and 10 fold, compared to the previous licensing fee for their Magento 1 site. Obviously, the level of increase depends on the merchant’s annual revenue. To make matters worse, since the end of Q1 2019 online retailers looking to buy or renew a Magento 2 license have been told that the fee includes their Magento Cloud Hosting, whether they take it or not. Considering that Magento Commerce Cloud penetration in EMEA has been around 10% (50% – 60% in the US), merchants will find rather frustrating to be under such pressure to align with Adobe Cloud strategy.

We can appreciate how this is a good strategy for Adobe. However, is this a good strategy for merchants? Many merchants using Magento don’t want an all-in-one suite; they want the flexibility to pick the right blend of technologies for their needs, the best partners and they also want to make sure these technologies are well integrated. This level of flexibility and freedom is one of the reasons that made Magento a leading eCommerce platform. The most experienced CTOs, CIOs, CDOs and Heads of eCommerce, like to avoid having all their eggs in one basket and generally refuse to be pushed into a corner.

Here is what you need to know to negotiate

  1. Some of those merchants, who told me their Magento license rose between 5 to 10 folds, managed to get a good deal after some good negotiation, e.g. twice the price of the previous Magento 1 license.
  2. Who pays three years up-front nowadays? Seriously, a three years up-front payment has no role to play in any modern Cloud company! Push back for a quarterly payment or annual at a stretch; cash is king!
  3. Avoid commercial lock-in. If things don’t go well, you need to be able to pull out, instead of being penalised for being let down and suffer in silence for the following three years.
  4. Avoid platform/technical lock-in. Collaborate with partners who are the best at what they do in areas such as Design, Development, Integration, Hosting and Marketing, and make sure they work together and keep each other honest. If one of them doesn’t deliver, it’ll be easier to replace the weak link with a better partner.
  5. Don’t leave it too late. Here is a tip from an experienced CTO of one of the largest merchants using Magento: “play a long game with negotiations… if you’re in a hurry to sign it gives you far less leverage. You want to make them work for it, ideally make them work as hard as possible! The more time they invest the more desperate they will be to get the deal, and it’s amazing how much the price can come down in those scenarios!”

If you feel the Magento sales rep is holding all the aces, be courageous and seriously put on the table the option of downgrading from Magento Commerce / Enterprise Edition to Magento Open Source / Community Edition.

You may need specific Magento Commerce capabilities, but remember that there is a vast eco-system around Magento:

  • Magento extensions to give your site some B2B capabilities;
  • faster and more intelligent site search with solutions such as Algolia and Klevu;
  • category merchandising with extensions; even better with Algolia and Smile ElasticSuite;
  • perfected shipping solutions with Shipping HQ and Scurri;
  • actionable intelligence and insight with Ometria;
  • a personal touch with Nosto;
  • a complete experience platform such as Exponea;
  • customer loyalty with LoyaltyLion and smile.io
  • advanced content with WordPress and Drupal

and the list could go on… Each one of the above solutions is very specialised and the best of breed at what it does. Magento became the prominent eCommerce platform with the help of its community and eco-system. Typically the laggard and incumbent retailers use expensive bundled solutions and love the idea of a one-stop shop because of inexperience and cumbersome purchasing departments; the disruptors and fast-growing companies have a clear strategy, experiment fast and leverage Open Source as well as the best partners and solutions.

Consider that one of the most powerful and sophisticated solutions recently released by Magento, “Multi Source Inventory”, was built by the brilliant developers of the Magento community.

However, Magento, which is now a strong commercially driven organisation, seems to be at odds with their own OpenSource product. They say “Graduate from Open Source | Lower Your TCO”.

The Magento sales rep will try to use the so called battle cards, and tell you about Total Cost of Ownership (TCO):

  • “But Magento Open Source comes with less out of the box” – See above how the amazing eco-system can help
  • “Magento Commerce Cloud eliminates cloud vendor” – They act as a cloud vendor, and not as good as some of the great managed cloud solutions out there with an extraordinary service
  • “Getting started with Magento Open Source can be a big job for your IT folks.” – true only if the merchant doesn’t use an AWSome fully managed cloud platform such as Akoova
  • “There is no such thing as free support. Magento Commerce offers responsive support to resolve issues quickly. You will pay for support, but problems will be fixed long before they affect your business.” – Magento “responsive” support has been the best joke in town for a long time…

I guess you know what to do with those battle cards… 😉

Now that the reputation of Magento is back on track, after a few bumpy years following the launch of Magento 2, the platform is in better shape, it’s growing in the enterprise market, and it remains the favourite choice in the mid-market.

We are observing a shift in:

  • the way fast growing merchants use Magento, which is shaping the underlying cloud platform, such as the need for highly scalable and specialised services for the traditional website, PWA related API calls, Mobile App API calls and scalable Admin;
  • the expectation of a real concierge service and demand to help manage increasing complexity; competency, collaboration and automation become essential for closing critical gaps;
  • the expectation of leveraging the capability of modern cloud infrastructure, to the extent of horizontally scaling the database, peering with other cloud infrastructures and migrating to Akoova with minimum downtime.

We’d love to hear about your own experience and the decisions you’ve made.

Thank you for reading! We hope you found it beneficial.


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