Tiers of ERP

ERP software comes in a wide range of capabilities, prices and use cases. Price in particular is highly variable; the typical licence cost can range from several thousand dollars a year to a million dollars or more. 

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Given the breadth of the range it is helpful to split ERP software into several categories or tiers. Historically, IT analysts used three tiers; tier 1 included ERPs produced by vendors with more than US$750 million in annual revenue, tier 2 ERPs by vendors with $250-$750 million in revenue, and tier 3 ERPs were designed for small and medium enterprises.

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However, classification by vendor revenue is not as useful as tiers by price. The five-tier structure below helps businesses segment the market into products that fit their budget. The tiers are also a rough but inexact guide to capability. There are tier three ERPs that are comparable to tier two ERPs in some (but not all) areas; pricing remains a more reliable differentiator.

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Tiers four and five include software that provides ERP functionality but is not typically considered ERP. Tier four, inventory management software, can be very powerful and include features found in advanced inventory modules in tier three ERPs. Tier five, small business accounting software, can add extra functions that mimic an ERP platform by connecting to applications in their enormous ecosystems. The tier five software vendors also have ambitions to build out their accounting software into “business management platforms”, a more modern synonym for ERP.

Tier 1 ERPs - the Giants

Very large multinational corporations and governments use tier 1 ERPs built to handle operations at the largest scale. These ERPs can handle billions of transactions, customers/citizens, or products. They are the only tier of ERP that is run in data centres owned by the customer (on premises) as well as the cloud, usually to meet data governance. These ERPs are typically heavily customised to meet the unique needs of the customer. 

Tier 1 ERPs are a reminder that all ERPs used to be like this – enormously powerful yet also horrendously expensive and risky to implement. 

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Examples: SAP, Oracle ERP, Microsoft Dynamics ERP Finance and Operations

Typical users: Banks, governments, airlines

Annual subscription cost (indicative): $500k to $m

Implementation cost (indicative): $250k to $m

Time to implement: 18 months or more

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Features: 

• Unlimited scale
• Unlimited customisation
• Extensive implementation times

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Tier 2 ERPs - the Multinationals

Tier 2 ERPs are used by international organisations and predominantly sold as cloud-based deployments. They are flexible and powerful enough to replace Tier 1 ERPs in many situations.

These ERPs are well suited for companies that have ambitions to expand into other countries, or manage offshore manufacturing in places like China or Vietnam while selling locally and internationally. They have a single database that manages multiple entities or subsidiaries which makes it easy to consolidate financial reporting across the whole organisation. Some also preconfigure the finance modules for tax jurisdictions of various countries and are available in multiple languages. 

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Examples: Oracle NetSuite

Typical users: Large franchises, global distributors, national non-profits, multi-state retailers

Annual subscription cost (indicative): $30k-$500k+

Implementation cost (indicative): $100k-$1m+

Time to implement: 3 months to 12 months

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Features:

• Multi-entity/subsidiary
• Multi-tax jurisdiction
• Multi-lingual

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Tier 3 ERPs - the Nationals

Some of the most recently released ERPs target small and medium sized companies and are the most affordable. They typically only support one entity per database. 

These ERPs are best suited to companies that need the power of an ERP to manage their existing operations or scale their product lines but don’t have plans to expand into new geographies. They can support multiple entities, which could be in other states or countries, but this is a less common scenario for their use. 

Odoo is unusual in that the software is run by the customer or by an ERP partner, the way all ERPs used to be deployed. Odoo is bucking the trend; all modern, globally-sold ERPs are run by the vendor (often referred to as SaaS or cloud-based). 

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Examples: Sage Intacct, Microsoft Business Central, Microsoft Advanced, Wiise, Odoo 

Typical users: SMEs in retail, wholesale, non-profits

Subscription cost (indicative): $5k-$100k+

Implementation cost (indicative): $20k-$100k+

Time to implement: 3 months to 12 months

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Features:

• Most affordable full ERP
• Built for SMEs
• Typically one database per entity

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Tier 4 ERPs - Inventory apps

Sometimes a business needs a heavy inventory solution rather than a full ERP. Inventory management applications have become extremely powerful, offering many of the benefits that you would find in an ERP’s inventory management module. You can manage multiple sales channels, stock locations, warehouses and assembly/light manufacturing partners without the hassle of moving to an ERP. 

Although the vendors and partners of these inventory software will often claim they are ERPs, they lack an accounting module, and need to record financial transactions with an accounting program like Intuit QuickBooks or Xero. 

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Examples: Unleashed, Cin7, TradeGecko

Typical users: eCommerce, field services

Subscription cost (indicative): $3,500-$12k

Implementation cost (indicative): $5k-$30k

Time to implement: 3 weeks to 12 weeks

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Features:

• Powerful inventory management with minimal implementation risk
• Relatively low cost – great value
• Integrates with existing accounting software

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Tier 5 ERPs - Accounting + ecosystem

Cloud accounting software can’t replace an ERP. However, the leading platforms have ecosystems of over 1,000 applications that can extend the core accounting ledger into industry functions at a very affordable cost. 

In fact, companies using older generations of ERPs may find that they can run just as effectively (for a lot less money) on modern cloud accounting software instead. 

Software vendors in this tier have also invested heavily in automating bank reconciliation and transaction management. Often it is faster and more accurate than the equivalent functions in ERPs. 

For a more detailed comparison, read What is the difference between accounting software and ERP?

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Examples: Xero, QuickBooks Online, MYOB Business

Typical users: Small businesses in all industries

Subscription cost (indicative): $700-$2400

Implementation cost (indicative): $1k-$3k

Time to implement: 3 days to 12 days (accounting software only)

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Features:

• Highly extensible through ecosystem software
• Excellent automation in financial accounting tasks
• Most affordable