Purchasing software can feel a lot like buying a new car. If you don't have the budget upfront, you can't buy it.
Fortunately, we're at work to bridge the gap between the salesperson and the stakeholder. After all, both are striving for the same outcome: To get the software purchase across the finish line.
Rather than focusing on a quick sale, starting from a healthy playing field in terms of deadlines, goals, and expectations can change the tone of a software negotiation and long-term relationship.
At Vendr, we specialize in day-to-day negotiations on behalf of our customers. With years of experience and thousands of negotiations under our belt, we’ve gathered best practices when approaching these SaaS buying conversations.
Negotiating new software contracts
Evaluate how this cost compares to the other providers you’ve gotten contracts for. Specific things to consider:
- Onboarding and support: What’s included and for how much.
- Unbundled pricing: Understand what each line item cost.
- Cost implications as you grow: Know the impact of adding licenses, features, and usage in the future.
- Price protection: Never accept one-time discount terms and try to avoid auto-renewal.
During renewals, suppliers will expect you to renew at an increase in pricing. Things to consider:
- Check for economies of scale: While you should expect total contract value to grow as time goes on, you should also expect for your rates to improve as a reward for that growth.
- Be proactive about pricing model changes: 80% of suppliers will change their pricing model within 365 days to see how it’ll affect their bottom line.
Two types of software licensing models
Not all SaaS pricing models are based off of users or employee size. Engineering software, for example, is consumption and/or volume based. For consumption-based models, you only pay for what you use as opposed to license-based models where you’re paying for the software whether or not someone is using it.
1. Annual contract measured monthly
For these contracts you’re making a monthly commitment. However, there is a catch. If you commit too high, you’re wasting money if you don't hit those commitments. If you commit too low, you’re paying premium on demand pricing for the overages.
2. Drawdown (or pool of funds) model
This is typically reserved for companies spending well into six figures. This is a great model because you avoid all overages and on-demand fees.
You pay lump cost upfront and every month the supplier draws down off of the balance based on consumption.
There’s a catch here, too. Since you don't have monthly overages, you’re not incentivized to track your consumption and as a result, most companies find themselves forced to renew early.
One-year vs. multi-year agreement
There is no right answer when it comes to considering one-year versus multi-year agreements. It all depends on your business, goals, and specific use cases.
Here are some general rules to follow that we’ve found working with customers:
If you’re a small business in hyper growth mode, stick to one-year terms. You want to have the flexibility to easily move off one tool and onto another.
If there is not significant discount advantage to a multi-year agreement, stick to a one-year term.
If it takes over three months to implement the software, strongly consider a two-year term because it will likely take just as long, if not longer, to move to something new.
If you want to prioritize saving time, consider a multi-year contract since you avoid needing to negotiate it the following year or two.
If you think the SaaS management owner or negotiator won't be able to get to a certain percentage of renewals each year, consider multi-year agreements.
How to know if you’re getting a good price on SaaS
Assuming you don't have a SaaS data source like Vendr, then we suggest you revert to the three bids and a buy method. You won't know what a fair price is unless you’ve made the bid competitive.
We’ve seen contracts where the list price is a supplier’s fair price, and they don’t discount. We’ve also seen others discount as high as 90%. In cases of limited competition, it’s common for suppliers to avoid negotiation knowing there are no other tools out there.
You can also vet purchases with your industry peers if you’re a part of a Slack group like Procurement Foundry or an online community like Capiche.