Save on SaaS: Four actionable insights for purchasing software
One of the highlights of our experience at The CFO Leadership Council’s 2021 virtual conference was the chance to share some insights from our founder and CEO Ryan Neu, moderated by fellow Vendr sales expert Sam Gorgone.
Purchasing software is becoming a more expensive and complex endeavor over time. From Vendr’s perspective, most companies purchasing software these days may be overpaying, based on a variety of factors.
Knowing those factors and how they may influence your software negotiation is critical to understanding pricing, knowing you get a fair deal, and committing to the right contract at the right time.
Here are four powerful methods you can use to better position yourself when purchasing software:
1. Take control of the software purchasing process
From a supplier perspective, the sales process is designed to meet a few basic goals.
The first is to shorten the sales cycle. The life-cycle of a SaaS sales deal is notoriously long, with the average time to close around 90 days.
Second, the close rate is stubbornly low, with even great sales reps seeing an average of 80% of leads walking away.
The general software sales approach is aimed at shortening the cycle, improving deal value, and getting customers back into contract as quickly as possible.
They aim to keep a tight leash on the deal in order to deliver. This approach puts buyers in a somewhat defensive position.
For the buyer, the question in every transaction then becomes, “Am I setting my company up for success in this partnership?” To ensure this, SaaS buying needs to become proactive with deals (especially renewals) to maintain leverage and ensure a fair price.
There are a few ways to keep software deals within your control:
- Put time on your side: It’s no accident that a sales rep follows up on renewal last minute. Calling two weeks before the contract renewal leaves very little time or wiggle room for end-of-term negotiations. Ryan suggests taking a proactive approach to renewals. Don’t wait for the call. Get on the phone with your rep well in advance (as early as 90 days) and begin the process on even footing. This leaves time for exploring your options – making sales reps more likely to put their best foot forward in pricing and terms.
- Itemize your software purchase: Bundling is a common tactic used to maintain supply-side flexibility in a contract. While it might be easy to approve a renewal quote that pops up bundled in email, that is rarely advantageous to the buyer. Ryan recommends asking for an invoice broken out by service or SKU. This allows a clear-eyed analysis of what you’re getting and opens the opportunity to tailor your service to current needs.
- Negotiate out of unfavorable terms: Terms that come bundled within a renewal should not be considered set in stone. Analyze your contract particulars when they arrive and negotiate for those that reduce your options. For instance, seek to remove auto-renewal clauses and don’t accept “same as last year” pricing on contracts where the overall contract value will increase over years.
2. Understand the factors in “fair pricing” when purchasing software
When entering into a new contract, Ryan believes some stakeholders focus on the wrong metric for establishing a fair price.
Many see pricing benchmarks as a sensible means of measurement, as it relies on what others have actually paid. However, fair price also requires context. Without it, buyers are negotiating based on just one data point.
Here are some parameters to consider when checking your pricing for context:
- Logo: If you know a company got a great deal on SaaS, consider the supplier benefit in acquiring them. Are they a large or well-known organization? If so, the pricing may depend upon the benefit of featuring that logo as a customer.
- Timing: A contract forged years ago may well benefit from legacy pricing. When looking at pricing benchmarks, be careful to consider when a deep discount may have been first applied. Knowing that information will inform negotiations more thoroughly than the discounted price alone.
- Volume: If a customer played their cards right, growth can improve the per-unit price. However, without context about volume, assuming the availability of a deep discount may hinder your own negotiations. When you compare prices, look at the available vital stats behind the company for clues about the discounting potential based on volume.
3. Make the most of consumption-based pricing in software negotiations
Consumption-based pricing can be a benefit to growing companies, allowing them to keep pricing in step as the organization scales. It avoids the potential waste spending involved in one-size-fits-all enterprise contracts and allows organizations some flexibility.
While this model can offer benefits, you still need to check the fine print.
Consumption pricing follows two basic models: Usage commitment and drawdown.
- In the commitment model, the stakeholder estimates how much service they'll need over the contract period (in the form of usage or credits). Actual usage will be calculated and any use beyond the commitment may incur surcharges or penalties.
- In the drawdown model, the stakeholder commits to a certain amount of usage in advance, drawing the pool down through use.
Though the consumption model has benefits over annual licensing, it’s not as cut and dry as it seems. For this reason, Ryan prefers the drawdown model.
“The problem with a commit structure is that it’s hard to win.”
Accurate forecasting is a hard target to hit for fast-moving companies. Often, stakeholders will over-or under-commit, leading to complications before the end of term.
Though drawdown offers better positioning, it still pays to ask questions. For instance, if your credits or usage pool reaches zero, what comes next? Can you renew early? Are there penalties to consider such as surcharges or increased usage rates?
On the other hand, what happens to unused credits? Is there a roll-over clause? It’s important to know the particulars before committing to drawdown amounts.
4. Choose the right software contract term for you
Another topic for debate: Re-negotiate yearly or commit to a supplier longer-term?
As with determining price, context is important.
In some respect, term length is a matter of preference and convenience. Is it worth going back to the drawing board frequently? Or is it in your interest to commit to an extended-term in return for a deeper discount?
As Ryan says, “The trade-off is: Do I want to spend the time to negotiate this contract every year? Do I want to take the risk that I can get the same price as the multi-year discount?”
While going multi-year simplifies things, it’s important to realize you’re reducing your optionality. If needs or mission change, you may be stuck with some shelfware. Large or technically complex companies may still come out on top in this equation.
The single-year option can also keep the supplier relationship fresh. Ryan shared advice he got from a customer saying, “I expect our partners to be willing to earn our business every year, and the only way to give them that opportunity is to do single-year deals.”
For those still trying to decide, Sam offers some guidelines for making the choice between single- or multi-year arrangements:
- If you are a small business but in hyper-growth mode, stick to one-year terms.
- If there is no significant discount advantage to a multi-year, stick to a one-year term.
- If it takes over three months to integrate and get set up, strongly consider a two-year term because it will likely take just as long, if not longer, to get off and implement a new tool.
- If you’ve done a deep proof of concept, used the tool at a previous organization, or your existing organization and you know it scales, consider a multi-year contract.
Between starting negotiations early, understanding different pricing models, and choosing the contract terms that best match your business goals, you'll better position yourself for every future software purchase.