How to negotiate a SaaS contract
Nearly every company in the world has undergone a digital transformation. This means that there’s not a company out there that’s not buying, managing and renewing software products on a regular basis. In fact, the average company has more than 100 software products that are used across their teams.
This means that SaaS investment is one of the biggest spends across company balance sheets. Avoiding inflated SaaS costs can be a critical lever to pull in order to ensure the company’s monthly and annual profitability, as well as ensure that SaaS buyers are simply getting the best software for the best price.
Software prices can be negotiated
SaaS negotiation isn’t often discussed because software service providers don't advertise the fact that they’re open to negotiating SaaS contracts. Instead, they tout price transparency on their websites, or use sales tactics to make SaaS buyers think that they’re getting a great deal.
It’s not just enterprise-level, multi-year contracts that can be negotiated. SaaS buyers from small and medium businesses can negotiate contract terms in their software license agreements, service level agreements (SLA) and master services agreements.
Using software negotiation tactics can help negotiate warranties, better support facilities, limitations of liability, and other relevant contractual clauses.
11 questions to ask while negotiating a SaaS contract
SaaS contracts can use a number of complicated terms that can make the negotiation process confusing for new SaaS buyers. Here are a handful of questions to ask of a sales rep that will allow purchasers and end users to better understand the full breadth of the software agreement, and what elements can be negotiated in the buyer’s favor.
1. Who is defined as the "licensee"? Does it refer to the SaaS buyer specifically, or broadly encompass all end-users who use the software?
2. Is the scope of the license defined in the contract? Are there any possible limitations in the buyer's use of the software, like number of users? If so, what are they?
3. How is the pricing represented in the agreement? What is the annual expense to the SaaS buyer when all charges are included? Are there any other chances of additional fees in the future? If so, what are they?
4. Does the agreement cover all performance requirements needed by the SaaS buyer? These could include an uptime guarantee, API integrations, support response times, and more.
5. What’s the preferred type of license? Does this SaaS vendor offer a multi-year or single-year license? How will the term license be renewed at the end of the term? Is there additional cost-savings when licensing for longer?
6. Does the SaaS buyer have any non-negotiables that the SaaS supplier needs to abide by? Some important “brass tacks” to consider are interoperability requirements, software functionality and data ownership.
7. What do the warranties cover? Is the SaaS product compliant with regulatory requirements like healthcare policies, GDPR, data protection regulation, and SOC2?
8. How does the SaaS vendor fulfill support obligations? Are the support obligations outlined in the license agreement or is there a separate support agreement?
9. Does the software vendor have access to any confidential data of the organization or its customers? Are there provisions in place to ensure confidentiality, data privacy, and security? What cloud services and cloud security are being used?
10. What’s the level of indemnification offered by the vendor? Does it cover intellectual property infringement, data breaches and breaches of confidentiality?
11. How well is the limitation of liability defined? Is there an overall cap on the software provider’s liability? Is there anything excluded from the limitation of liability?
What buyers can negotiate in a SaaS license agreement
Software negotiation isn’t simply just lowballing or asking for a discount. There are a number of key value levers that SaaS buyers can use, whether onboarding to a new product for the first time or renewing an annual contract. In order to decrease price or increase the software’s value, use these items to inform negotiation conversations with suppliers.
Yes - it’s possible to buy SaaS for less than the price listed on the website. At Vendr, we have thousands of customer data points that show that most companies are overpaying for their software stack. Here are the dos and don’ts of negotiating the pricing of SaaS purchases like an expert.
- Do understand the pricing model tiers that are offered by the software vendor and how the company would be paying for seats, functionality, or usage.
- Do wide-breadth competitive research to understand similar solutions in the space, the features they offer, and what they chrage.
- Do identify a list of features that end users can do without, look for support options that aren't needed and use them to negotiate a better agreement.
- Don’t be mesmerized by a short-term pricing tier on a monthly contract. Provided that the product will be useful for a longer period of time, try negotiating for a multi-year contract, which will provide the opportunity to negotiate lower rates.
- Do keep expansion plans and future users in mind. If the contract includes additional future licenses at a discounted rate beforehand, the SaaS buyer won't have to pay retail rates later.
- Don't put off software purchases until the last minute, because it provides little to no leeway to negotiate.
If the SaaS buyer is able to understand the true value of what they are buying, they will be able to identify SaaS sales tactics that try to lowball value for higher pricing. Armed with all the above information, SaaS buyers be able to open a conversation with the sales team to strive for a mutual value.
SaaS buyers might be new to SaaS renewal negotiations, but SaaS providers are well-versed in them. In order to maintain and improve the vendor relationship, SaaS buyers should start negotiating SaaS contracts at least a quarter in advance of their renewal date for yearly contracts, and a year in advance for multi-year agreements. Consider avoiding automatic renewal packages, as they will likely compromise the ability to negotiate renewal terms each cycle.
Rather than handing everything over to the negotiation team, a strong negotiation tactic is involving end-users who have a grasp of the product's functionality and importance to the business. Their insights are bound to help the SaaS buying team identify troublesome areas and address them in the renewal negotiation.
As part of the renewal process, it’s likely that the SaaS service providers will be looking forward to pitching new solutions and upselling opportunities that maximize their revenue, even though they may not maximize the software’s value. Keep an open mind about these upsells, but feel free to pass on items that don’t serve the end user’s needs.
In addition to general telephone and chat support during malfunction incidents, support also includes the delivery of software updates and continued maintenance of the SaaS applications. Depending on the software product and its level of use within the organization, teams may be heavily relying on support or not at all.
SaaS buyers need to carefully read the support services clause to understand any limitations to these services, and that they don't incur additional charges for taking advantage of them at a certain volume.
Additionally, it’s wise for software purchasers to determine the level of support the product would need. If it’s not a critical application, then it doesn't make sense to pay additional for 24/7 white-glove support. This can be one of the negotiation factors, since buyers can offer to pay less for limited support.
Take the time to review the quality of support that the provider offers. Buyers can determine this using support metrics like first response time, first-contact resolution rate, C-SAT, and more. Ask sales rep to provide these metrics, as well as asking customer references about the quality of support that they’ve received.
If the SaaS product is bound to be a critical solution, negotiate for dedicated support staff like customer success or account managers. Though this won’t result in a cost-savings, it will likely result in better product adoption — and higher value — throughout the organization.
Warranties are an overlooked clause in the SaaS agreement. SaaS buyers often don't make an effort to read through what warranties are included or excluded in the agreement until they hit a roadblock with the product's performance. Often, legal teams or retained law firms may be interested in reviewing warranty terms.
Normally, warranties cover instances like performance hiccups, infringement issues, and cybersecurity measures. They allow for a remediation or a cancelation of the software contract within a certain time period.
Though the warranties section includes a broad disclaimer of all the warranties promised, look for nuances such as limitations in the case of a data security breach. Check whether the SaaS service provider offers alternative remedies or sticks to a money-back guarantee. Buyers may also be interested in warranties that cover other unfortunate use cases where the end users cannot use the product to its full capacity.
5. Limitation of liability
Most SaaS companies don’t offer unlimited liability for everything that occurs in the presence of their product. A limitation of liability clause helps suppliers put a cap on the monetary value or eliminate the associated risk altogether. These limitations typically prevent SaaS buyers from using the software vendor’s product for illegal, non-compliant or otherwise compromising to the good standing of the software.
When looking over the limitation of liability clause, SaaS buyers can accept instances where indirect types of damages are completely excluded. But, make sure that there’s at least a small cap on the amount of direct damages made to the product. While negotiating SaaS contracts, buyers can also ask for a higher cap on liabilities like data breach.
Again, consider including professional legal advice in reviewing contract terms related to liability.
How negotiating SaaS contracts leads to better vendor relationships
Negotiating a SaaS contract isn’t setting up the relationship off on the wrong foot. In fact, it’s the opposite. By ensuring that the SaaS buyer's needs are met, the relationship with the SaaS provider becomes even more valuable and has the potential to last into the long term.
Instead of a negotiation where someone “wins” and “loses,” the best SaaS negotiations are a collaboration to create a streamline contract that provides mutual value for both parties. These contracts lead to:
- Improved forecasting and budgeting to support procurement teams
- Cost avoidance and cost savings
- Improved stakeholder and end user satisfaction
- Improved compliance
- A reduction in waste and an increase in productivity
- Improved procurement metrics to support all business functions
- Improved contract management processes and clear deliverables
How Vendr can help software buyers jumpstart SaaS negotiations
At Vendr, we specialize in day-to-day negotiations on behalf of our customers. With years of experience and over $1B of negotiations under our belt, we’ve gathered best practices when approaching these SaaS buying conversations. Our executive buyers are former SaaS sales specialists with years of experience on both sides of negotiations. By partnering with Vendr, SaaS buyers are able to navigate negotiations, deals and contracts with ease.
Originally published January 2022. Updated April 2022.