The real costs of not negotiating on software contracts

While some professionals thrive on the art of a well-crafted deal  – and some love it enough to pursue a career in procurement – many software buyers simply don’t feel comfortable negotiating for a discount.

However, great software negotiation levels the playing field. When you enter the negotiation process, you preserve the cash needed to make growth and innovation possible in your business. 

Vendr is built on the idea that SaaS software negotiation is for everyone.

To learn more about the value of software negotiation, we sat down with Vendr Executive Buyers Michael Singer and Jen Challburg. Michael and Jen offered us some unique insights taken from completing hundreds of deals on behalf of customers. 

Both were excited to share the levers buyers can use to gain better positioning when negotiating for the SaaS software tools they need. 

Here are some of the questions that we had about software negotiations with their answers and insights.

What are the pitfalls of skipping a software negotiation?

Failing to negotiate your software contracts has three major, immediate impacts:

The buyer doesn’t get a fair price

If you don’t ask for better pricing, your sales rep isn’t going to offer it.

Most times, pricing on net new software contracts has significant wiggle room - far more than most buyers realize. Entering into new contract negotiations with this understanding puts buyers in the driver's seat and helps them land on the right features, contract terms, and license volume for their needs. 

You don’t need to shoot for huge percentages or deep concessions, says Jen.

“Even small items, if you can get them removed or negotiate on them, they add up.” 

A small percentage reduction can bring significant savings on a contract that may exceed $150,000 in total spend, for example.

In many cases, getting a fair price when purchasing software is as simple as asking, says Jen. Talk to the sales rep about your specific needs and budget to see what possibilities exist.

Paying more over time

Beginning the supplier relationship at the list price also has consequences for pricing in subsequent years. Because uplifts are typically based on a percentage of current license prices, failing to negotiate for better pricing in year one has a compounding effect for each year after that. 

In many cases, big-name SaaS software implementations will become a fixture in the tech stack. This makes up-front negotiation even more important. 

“As people enter these agreements, they’re signing up for software tools embedded in their environments for a while,” explains Michael. 

Some of these tools – for instance, large, integrated platforms like Salesforce – incentivize reliance and are difficult to abandon once implemented. This makes it likely that these contracts will encounter routine uplifts of 5 or even 10 percent annually. Negotiating off-list prices early on mitigates the impact of these uplifts over time.

The good news is, if you didn’t negotiate on the price in the first year, it’s not too late. Suppliers who recognize the need to stay competitive will be willing to work on price to keep your business. This is especially true at end-of-year when companies establish future budgets and evaluate the tech stack in preparation for year-end renewals.

Paying to maintain shelfware 

It’s vital to evaluate the business case and license utilization for renewals before you sign on for another year. In many cases, changes to the business and fluctuations in user numbers result in a license surplus. 

“Many times, our customers are paying for things they don’t even use,” explains Jen. If you don’t commit to a review period before renewal of your SaaS agreement, you may end up paying for unneeded software seats or “shelfware” apps.

How do you set the stage for good software negotiations?

Sometimes, Vendr buyers begin negotiations after preliminary sales talks have taken place. If stakeholders don’t know the ropes when they buy SaaS software, it may get the buying conversation off to a rough start and impact fair pricing. Your finance team can set buyers up for success by creating education around software buying and negotiation. 

Document company prerequisites

One way to prepare your stakeholders for buying conversations is to create a list of prerequisites to apply to every software deal. Often these prerequisites focus on data security minimums, service-level agreements and legal protections. Combined with financial provisions, these prerequisites will start your stakeholders off on an even footing in the negotiation. 

Michael suggests his clients establish a standard terms list for every transaction that includes items such as net terms and removal of automatic renewal clauses. This creates a necessary buffer between stakeholders and reps when discussing the details of a deal. 

Develop a culture of competitive analysis

When Jen enters the conversation on a deal with a stakeholder, her first question is, ‘do they know they have your business?’ When a sales rep goes into discussions knowing renewal is a foregone conclusion, they’re less likely to offer flexibility on pricing or terms and conditions. 

Jen encourages every stakeholder to tread lightly in the early talks about a tool. Let your sales rep know you’re evaluating alternative SaaS products, what your timeline for purchase is, and what factors will play into the decision. 

Even if you’re keen on another year of service, approach the conversation as an exploration of what’s possible. With very little effort on your part, the sales rep may be able to produce more competitive options.

Related: The software renewal checklist: 9 factors to pay attention to

Consider levers beyond price

Not every contract win is about the bottom line. When there isn’t room to move on price, consider other factors in the deal, such as onboarding support, training, payment terms, pre-scheduled uplift pricing, and enhanced features inclusion. There are many ways to create value in a deal that doesn’t affect the price-per-license. 

What are some ways to save on your next SaaS contract?

“Good negotiation doesn’t have to be confrontational,” explains Michael. It’s all about knowing what levers are available to you as a buyer and when to employ them when negotiating your SaaS agreements.  

Here are powerful techniques that Jen and Michael recommend for getting the best deal on SaaS. Many of these offer added benefits to the organization: 

1. Don’t settle for the list price

Most buyers don’t accept the sticker price at a car dealership. But many will quietly accept the first price quoted when negotiating SaaS contracts. But just as with new cars, software has a healthy profit margin attached - sometimes as high as 70 or 80 percent. 

That padding gives sales reps (and buyers) a lot of flexibility when bringing a deal together. Moving “off list” for every deal equates to hundreds of thousands in savings over time. 

2. Know your usage levels

When negotiating a SaaS software renewal, knowing your current and expected usage levels can make a significant difference in your pricing power. If your current usage isn’t meeting expectations, for instance, due to project changes or fluctuating headcount, it’s important to align your licensing agreement with your needs. 

By the same token, if your needs will increase considerably over the next contract period, negotiate to take advantage of volume pricing as you add licenses. 

You can ask for pricing to adjust as you meet a 10, 50, or 100-seat threshold. Keeping pricing in step with your usage throughout the contract can save thousands of dollars without going back to the drawing board. 

3. Leverage your logo

Marketing partnerships play a role in the price you pay for software. If your logo is well-known or valuable to the supplier, consider partnering with marketing on a case study or endorsement in exchange for better contract pricing. This is a great way to add value to a contract and strengthen the supplier relationship to benefit both parties. 

4. Consider multi-year contracts

While not every software deal lends itself to multi-year contracts, it may be beneficial for foundational tools such as Zoom, LinkedIn, Slack. Multi-year agreements provide the supplier with guaranteed recurring revenue and offers advantageous pricing for a tool you know will remain in demand over time. Often, multi-year contracts come with significant discounts.

5. Negotiate with cash flow in mind

Most stakeholders aren’t closely familiar with their company balance sheet, but payment terms can serve as a powerful negotiating lever for companies keen on managing their finances. 

When purchasing software or beginning a renewal, ask about extending your payment terms to net 60, quarterly, or annually. 

“People see savings as only making the dollar amount of the contract lower,” says Jen. “Payment terms can provide many financial incentives for the customer as well.” 

Often, these software and services agreements will result in better overall pricing and increased flexibility for your Finance team. 

Summary: What we’ve learned about skipping a software negotiation

The short answer: don’t skip it.

Overlooking the negotiation phase of buying software has immediate and long-term implications, including overpaying upon signature and paying more than you need to over time.

In order to take advantage of the opportunity to negotiate:

1. Set the stage with the seller. Make sure you have company prerequisites documented prior to discussing the details of a deal with the supplier. 
2. Develop a culture of competitive analysis. Tread lightly in your initial meetings and let the sales rep know you’re evaluating multiple tools for more flexibility in later conversations.

Now that you know the real costs of not negotiating, here’s what you can look out for in future SaaS contracts:

1. Don’t settle for the list price
2. Know your usage levels
3. Leverage your logo
4. Consider multi-year contracts
5. Negotiate with cash flow in mind

For the best negotiations, leverage an expert

Even if you’re a seasoned and competent negotiator, having a knowledgeable partner in your corner can supercharge your outcomes. Vendr buyers review and negotiate hundreds of deals on behalf of clients, giving them specific insight into the pricing, customer data and opportunities available to buyers. 

If your SaaS software procurement could benefit from data-driven negotiation and in-depth expertise, talk to a Vendr expert and set up a free software savings analysis.