Organizations that invested heavily in SaaS during the pandemic are facing challenges with cost escalations and poor ROI. The major reasons were the lack of visibility, inadequate planning and ineffective negotiation strategies, resulting in subpar returns on spending and exceeding budget limits.
If you don’t want to be on that side of the road, you must have a well-thought-out strategy.
I’ve encountered many founders and teams who dread vendor negotiations; the mere thought overwhelms them. They worry that negotiating with vendors might spoil a strategic relationship.
In this environment of economic uncertainty, software cost optimization has become every organization’s priority, as it is the next big expense after employee costs. So, how do you negotiate with the vendor the right way while simultaneously considering the strategic nature of these vendor relationships?
This article discusses the must-know tactics to follow during vendor negotiations to secure flexible pricing terms and build lasting and mutually beneficial partnerships.
Even though vendors don’t publicly disclose that they’re willing to negotiate, there is always room for negotiation. You just need to have the right playbook.
Understanding the What, When, Why and How
As a SaaS founder, I’ve encountered countless times where my prospects get to the negotiation phase without knowing their team’s requirements.
Not understanding what your team needs, why they need that specific application, when it is needed and how they will use it to complement your revenue is not a smart choice.
This allows vendors to upsell their products or quote a higher price than the benchmark, and you will end up with escalated spending.
Here’s what I do whenever a purchase request comes to my table.
Ask the right questions:
- What benefits will the organization derive from using the application?
- What is the planned timeframe for the team’s application use?
- How soon can we anticipate its influence on our revenue or expenses?
- How many seats/licenses are required?
- What are the essential features that take precedence?
- Does it involve regular updates or demand additional investments?
These questions will help me understand exactly what my team needs, and I will enter negotiations armed with these insights and purchase the right product at the right price, sometimes even lower than the benchmarks.
So, know what you need to ace your negotiations with vendors.
Understand their pricing
SaaS vendors use various pricing plans, so it is important to shortlist the vendor with a pricing plan that aligns with your needs.
While negotiating with vendors, ask how the pricing will change when your requirement increases from 25 to 50 licenses. Would the per-license cost remain unchanged, or would there be an adjustment in the pricing structure?
Vendors regularly adjust their pricing plans annually, and as a rapidly expanding organization, your requirements are also expected to increase significantly. Therefore, it is crucial to proactively negotiate pricing changes in advance, enabling you to allocate your budget effectively as you continue to scale.
In my case, I usually prefer a consumption-based pricing plan that is billed monthly rather than yearly.
This gives me the flexibility to pay only for what my team uses, and monthly billing gives me better control over my budget, greatly preventing overspending.
Negotiate for what you need
Organizations seem to have this practice of forecasting early growth and purchasing surplus licenses/seats. It’s the usual tactic vendors use to get you to pay more.
When your requirement clearly states 15 seats, negotiate only for those required seats. Do not over-purchase licenses, or you’ll end up with unused licenses, resulting in wasted spending and poor ROI.
We all know about the hiring frenzy during the pandemic. Well, there was a purchasing frenzy, too. Organizations purchased additional licenses, thinking their businesses would scale post-pandemic. Unfortunately, for some, it was quite the opposite.
All those additional licenses went unused, greatly impacting the ROI. Therefore, it’s advisable to refrain from forecasting early growth and negotiate based on current requirements, which will also help safeguard against vendor upselling tactics.
Do not overlook agreements
Yes, agreements are negotiable too, and companies often sign them blindly.
Contracts may include a termination clause. You can request a termination for convenience option, allowing you to end the contract early without incurring any penalties from them.
Likewise, in the media rights clause, you can ask for a discount from the vendor if they intend to use your organization’s name for PR.
You can ask for a 90-day payment for the subscription, or if you intend to pay it sooner, you can ask for a discount for quick payments. An auto-renewal clause will be included in your SLAs. You can negotiate to remove it from the contracts to avoid auto-renewals. These are some of the clauses that you can negotiate in your agreement.
Organizations often don’t negotiate or overlook the clauses. This will lead to missed savings opportunities and, in some cases (auto-renewal), escalate your spending
Just like pricing increases, there are clauses like auto-renewals, exit penalties, etc. that can be negotiated to avoid additional hidden expenses in the future.
Never reveal your budget
Do not disclose your allocated budget to vendors; it’ll give them an unfair advantage, and they might not be open to negotiating.
Revealing your budget significantly constrains your negotiating flexibility. In addition to the budget, refrain from divulging sensitive information to vendors.
Drawing from my personal experience, it is advisable to refrain from accepting the initial offer. Doing so can incentivize vendors to include hidden charges or additional expenses in the deal.
Remember, there is always room for negotiation.
Shorter sales cycle
How quick is your decision-making process? Does your approval for purchases involve multiple rounds of stakeholder reviews, or is it swift and streamlined?
Since vendors generally favor shorter sales cycles, efficient decision-making can be advantageous during negotiations.
In my years of negotiation experience, I always figured that vendors need you as much as you need them; they don’t want to lose a potential customer. Therefore, you can capitalize on your swift decision-making process and secure advantageous deals.
Leverage competitive bids & benchmark pricing
The tactics my team of SaaS buyers use to create room for negotiation involve leveraging competitive bids and pricing benchmarks.
A SaaS vendor wants you as much as you need them. They’re not likely to let a potential customer go. Conduct competitive research, look for cost-effective alternatives, and use them during negotiations.
Accessing pricing benchmarks is another powerful tool. You gain valuable negotiation leverage by knowing what your peers pay for similar products. With this data, you can secure the right product at the right price.
A barter deal
I’ve encountered various situations where the vendor was reluctant to offer a deal aligned with our needs. I didn’t look for an alternative; instead, I focused on the vendor’s pain points to see where they were facing trouble.
It turned out the vendor’s team was using spreadsheets to track their software spend and renewal. So, I offered our product as a solution to centralize their spend tracking and automate renewals.
As part of our product exchange arrangement, I proposed that the vendor extend a favorable offer for their product, and the vendor was happy to provide it.
Likewise, you can offer your product as a solution to the vendor’s pain point in exchange for a deal on their product. It will be a mutually beneficial deal.
Mastering the art of negotiations
In my personal experience, I consider negotiation a game of insights and market understanding. It’s not rocket science like some project it to be.
Knowing what you need and understanding the market’s pricing will give you enough leverage to ace your negotiations. Do not, under any circumstances, frustrate the vendor; they have the right to walk away as much as you do.
Maintain a friendly relationship through the negotiation process, showcase the potential value they can get by partnering with you, and secure the right deals.