My father, also known as “R0ML” once described a methodology for evaluating volume purchases that I think needs to be more popular.
If you are a hardcore fan, you might know that he has already described this concept publicly in a talk at OSCON in 2005, among other places, but it has never found its way to the public Internet, so I’m giving it a home here, and in the process, appropriating some of his words.
Let’s say you’re running a circus. The circus has many clowns. Ten thousand clowns, to be precise. They require bright red clown noses. Therefore, you must acquire a significant volume of clown noses. An enterprise licensing agreement for clown noses, if you will.
If the nose plays, it can really make the act. In order to make sure you’re getting quality noses, you go with a quality vendor. You select a vendor who can supply noses for $100 each, at retail.
Do you want to buy retail? Ten thousand clowns, ten thousand noses, one hundred dollars: that’s a million bucks worth of noses, so it’s worth your while to get a good deal.
As a conscientious executive, you go to the golf course with your favorite clown accessories vendor and negotiate yourself a 50% discount, with a commitment to buy all ten thousand noses.
Is this a good deal? Should you take it?
To determine this, we will use an analytical tool called R0ML’s Ratio (RR).
The ratio has 2 terms:
the Full Undiscounted Retail List Price of Units Used (FURLPoUU), which can of course be computed by the individual retail list price of a single unit (in our case, $100) multiplied by the number of units used the Total Price of the Entire Enterprise Volume Licensing Agreement (TPotEEVLA), which in our case is $500,000.
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