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How Rational sells OEM licenses.

Rational Systems sells a small but vital piece of technology--a DOS extender that allows PC developers to create products that exceed the traditional 640K memory barrier. Rational president Terry Colligan says the technology has become so popular that he has so far negotiated "about 500" OEM contracts, including deals with virtually all the major DOS publishers.

Even though Rational finds itself in a seller's market, however, Colligan still tries to negotiate OEM contracts that his customers feel are fair. "I don't think anybody we've done business with lately feels they were ripped off," he says.

Rational's first OEM customers weren't as enthusiastic, he admits. The company started with a flat $29,000 license fee that provided source code, tech support, and unlimited distribution rights. Smaller prospects thought Rational wanted too much cash up front; larger companies wanted to buy unbundled components. "We didn't get many sales," he admits.

So Rational quickly revised its pricing structure. The new version calls for a $5,000 start-up fee (which includes a developer's kit and a license for 200 runtime copies), $10,000 for a site license for developers tools, and $25,000 for source code. Customers now choose between a $30,000 unlimited distribution license or per-unit royalties. In addition, the company sells ongoing tech support for "a little less than $200 a month."

The unbundled approach lets Rational be much more flexible in dealing with larger accounts, Colligan says. "We're smaller than almost every one of our customers, so we try to do things the way the customer wants." Moreover, flexibility has had an unexpected payoff: "We actually close more deals now, even though the total price is sometimes three times more than it used to be."

Colligan says he's learned several other techniques that make OEM deals much easier to negotiate:

* Set a price that's realistic for the customer: No matter how vital an OEM component may be, says Colligan, customers are almost never willing to pay more than 5% of the net price of their own product--"and 2%-3% of net is more likely to be acceptable." Rational bases its prices on a declining royalty schedule that starts at $30/unit and drops to $10 over 10,000 units; high-volume customers typically can get an even lower price by buying a one-time unlimited license.

* Keep the contract short: "Our first contract was 30 pages long," he says. "After three deals, we went to a two-page contract with a bunch of one-page addendums." Colligan says he continues to hammer away at Rational's lawyers to eliminate obscure language and ambiguous clauses that his customers' attorneys used to challenge. "Now, most people sign the contract right away."

* License source code--reluctantly: The one exception to Rationalls user-friendly contract is a "deliberately ugly" source code license. Most big OEM customers eventually insist on access to source code, he points out, but he tries to minimize Rationalls exposure. "I don't even trust escrow agreements. A bankruptcy court has astounding powers to set aside contracts. It just takes one bad court decision for you to lose control of your technology."

* Offer a money-back guarantee: When Rational first signs up a new customer, the contract includes a clause promising a full refund if the customer isn't satisfied. We're committing that the implementation will be successful," Colligan says. He notes that only a small number of his customers have asked for refunds; several of these were "encouraged" to drop out because they seemed likely to impose an excessive burden on Rational's tech support department.

Terence M. Colligan, president, Rational Systems, 220 North Main St., Natick, Mass. 01760; 508/653-6006.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Rational Systems' licensing of its DOS extender
Publication:Soft-Letter
Date:Jul 15, 1991
Words:601
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