How to negotiate a software contract
Whether you’re the SaaS buyer or the seller, most people still consider negotiation a battle. When talking about negotiating the terms of a software contract, you might hear someone say:
- "I'll play the bad cop."
- "We won / lost that negotiation."
- "Let's beat them up over price."
We’ve been trained to see the negotiation table as a battle. But, this outlook is costing your company time and money. If you hear statements like those above from either your sales or procurement teams, it means that they are viewing contract negotiation through the wrong lens.
The buying process mentality of "us versus them" pits the buyer and seller against one another, when, in reality, both parties are trying to accomplish the same goal.This poor take on negotiation leads to undesirable for both parties, and a sour start to a new vendor relationship.
Imagine if a new personal relationship started with you negotiating how often one person would pay for dinner -- not the best way to kick things off and plan for a long-term engagement.
Research shows, according to Brandon Voss of Black Swan, people are six times more likely to give you what you want if they like you. Having a successful contract negotiation, and ultimately, successful software procurement, is about the tradeoff of giving and receiving shared value.
So how do you create that shared value? Here are five negotiation skills for software buyers and sellers to enter negotiations to yield better results.
- Listen actively to the needs of the other party
- Communicate directly to build better relationships
- Use honesty to your advantage
- Solve problems together
- Make your negotiation process efficient
Listen actively to the needs of the other party
Don’t forget how engaged your mind needs to be to listen actively. It's not about listening to the exact words someone is saying. In fact, it’s about listening to the underlying message and needs.
In order to fully respond, both salespeople and SaaS buyers need to extract and synthesize these needs of the other party.
For example, when I worked on the sales team at HubSpot, a prospect might say:
"I start my day by logging into our CRM and ensuring everything is updated. I then go to LinkedIn to find prospects that I can reach out to, which takes forever. It can get frustrating to track sometimes when I'm connecting all the tools to our analytics platforms, but overall it's manageable."
What I'm really hearing is:
This prospect is wasting a ton of time going through a slew of tools. They seem content, but not enthusiastic, about their current workflow. Their work could be easier and more efficient.
As the salesperson, my job is to understand the underlying context to provide a software solution that he or she may not even realize they need yet. This sets the stage for a successful negotiation.
As a SaaS buyer, active listening is also critical to an effective negotiation. Often, a salesperson is trying to communicate the top-line value of their software tool. Are they communicating the value in specific or vague terms? Are they answering your questions directly, or are they needing to follow up? Do they seem to be understanding what your needs, as a buyer are? Hearing through the sales pitch to capture these details will help the buyer become a better negotiation partner when this stage arrives.
Communicate directly to build better relationships
Your counterpart — the person you are buying SaaS from, or selling SaaS to — will always be looking for the best deal to meet their business needs. And let's be real, as a salesperson or procurement specialist, you are too.
Sometimes you'll hear a first offer for contract terms that are completely unreasonable. A salesperson may want you to go way over budget, have an extremely long onboarding cycle, or want to lock you into a long-term contract. A buyer might be looking for an undercut discount, an unrealistic time frame, or functionality that doesn’t exist.
Rather than getting upset or assuming the contract negotiation is over, great negotiators know to be direct and communicate their needs ahead of time. It's okay to tell a software buyer or seller that their request is unreasonable — as long as you give examples. This negotiation skill is the first step in creating an effective counteroffer.
Believe it or not, sometimes "no" is the best thing a good negotiator can hear when establishing software contracts . Offering your partner in negotiation the option to say no is empowering. They’re able to make a better, more informed choice.
During one negotiation class at MIT, the professor had his class do an exercise where they had to write a salary negotiation offer down on a paper and quietly hand it to the moderator versus speaking directly to their counterpart, like the kind of scenes you see in movies).
A number of students tried to undercut their counterparts for their own best gain, losing their partner’s incentive to work with them again in the future.
The professor stopped the class to say: "You just screwed over a classmate, someone you may work with post-graduation, someone you may need to negotiate with on a real deal five years from now. Remember how your indirect behavior tarnished the beginning of that relationship."
Use honesty to your advantage
In order to get to the optimal negotiated agreement in a software contract, a seller or buyer might make claims that don't hold true.
A prime example of where this goes wrong is online car sales. If one dealer is offering you a discount and claiming this is the BEST offer you'll ever get, but another dealer or quick Google search unlocks a dealer giving you the same car, model, and year at a lower price, you're left feeling scammed and no longer feel you can trust the initial dealer.
This applies to tech, too.
For example, if you logged into CDW to buy a new Apple Mouse, you might see this:
But is that actually a better offer? It depends. In this case, no. When you do some basic due diligence, it’s easy to see that it would actually be cheaper to buy from Apple directly at the market value.
Stakeholders are powered with more tools, information, and options than ever before. It is not sales’ job to trick them into small gains. Instead, sales and software providers should use these negotiation skills build relationships that lead to positive negotiation outcomes for everyone involved and through the long haul.
Remember, your contract negotiation isn’t just impacting your current bottom line. This is the first step in your future contract renewal.
Solve problems together
A pet peeve some employees have about their managers is when said manager uses "I" instead of "we." It makes their work feel like a non-essential part of what the team has accomplished.
This is similar at the bargaining table. Using "we," "us," and "our'' in a software negotiation helps signal to your counterpart that you're negotiating for a mutual benefit. You're allowing your negotiation partner to be viewed as a team member versus an adversary. This is how you arrive at a “win-win” scenario.
Here's how this negotiation technique sounds in action:
"How can we solve this problem together?"
“What happens if we aren't able to figure this out?"
“How can we ensure that this doesn't happen?"
The best negotiations are the ones where the software vendor and the SaaS buyer come together to solve mutual problems.
Make your negotiation process efficient
Respect your negotiation partner’s time and that they respect yours. Often, conversations start by skirting around various social subjects, like the weather or a commute. While there's nothing wrong with pleasantries, constantly going on side tangents can appear disrespectful of someone's time, whether the sales meeting is face-to-face or virtual.
To be a more efficient and better negotiator, avoid questions with a binary response (aka "yes" or "no"). Instead, frame open-ended questions with "how" or "what" to dig deeper into the problem as you unravel remaining tasks and potential outstanding items that both teams can work on.
Just about every software negotiation ends with homework for both sides. To tee this up efficiently, a useful negotiation skill is ending the conversation with questions like:
- "What will happen once we get off the phone today?
- "How can we ensure that we have made progress by our next conversation?"
How to get in the mindset for software negotiation
When you find yourself in your next negotiation, instead of thinking about how you are going to win, step back and think about what you can do to empower your partner to help solve your challenges together.
Consider adopting a growth mindset when it comes to your journey as a negotiator and dealmaker. If you approach each sales meeting as an opportunity to open your perspective, change your own mind, and learn about a new person and product, you’ll stop seeing the negotiation process as a “haggle” and instead as the beginning of a growing relationship.
How Vendr can help save money on every software negotiation
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.
Get an inside look into the platform where you can discover and buy new tools, see how much you're saving on software, improve your negotiation strategy and stay up to date on all of your deals with our free guide to the Vendr SaaS buying platform.
Ryan Neu is the Founder and CEO of Vendr, where he leads a 200+ person team building the buy button for SaaS. Before founding Vendr, Ryan was a renowned B2B SaaS sales leader at both InVision and HubSpot, where he honed his SaaS trade and experienced the frictions that Vendr hopes to solve first hand. Ryan moved into B2B SaaS after a short stint in Accounting at KPMG and received his M.S. in Accounting from Boston College and his B.S. in Accounting from College of Charleston.
Originally published July 2019. Updated April 2022.