Software negotiation tactics: tips from the experts
Aimee Manning | OCT 14, 2022
Businesses are spending more on their software contracts than ever before. So much so that Gartner forecasts global SaaS spend to grow by a further 16% in 2022, to a value of $177 billion. After all, as your business, workforce and ambitions grow, the number of licenses and features you require increases, and therefore so does your investment in SaaS.
But what if there was a way to keep these costs to a minimum, even amidst rising headcounts and soaring inflation rates?
Well, there is. Because vendor pricing is rarely set in stone, and when armed with the right leverage, you can almost always negotiate better rates.
In this guide, we’ll explain how.
More specifically, we’ll discuss why software negotiation is so important for keeping spend to a minimum, outline the key variables that you can bargain with, share our top SaaS contract negotiation strategies, and detail how you can go about gaining the leverage you need to secure the best possible contract terms.
Why negotiate your SaaS contract?
Unfortunately for businesses, it’s notoriously difficult to get transparent SaaS pricing.
Because the majority of vendors choose to obscure their list prices. In fact, it is for this reason why as many as 90% of companies are overpaying for their SaaS products by as much as 20-30%.
Think about it — it’s the vendor’s job to achieve the highest value sale, but without any frame of reference on pricing it’s almost inevitable that you’ll end up paying more than you need to.
This doesn’t have to be the case though. As much as you may rely on their software, they equally rely on your sale — so there’s usually a happy medium that can be reached through negotiation.
So, whether you’re inquiring about a new product or renewing your existing plan, it’s always worth negotiating your software license agreements, service level agreements and master service agreements, to ensure you’re signing up on the best possible terms.
Negotiation shouldn’t begin and end with the upfront cost though. There are many contract terms that can effect your overall expenditure, and you’ll need to be clued up on what they are in order to effectively reconcile and get the best-fit product for your money.
What can you discuss in SaaS negotiations?
To address all of the hidden costs, terms and conditions that could affect your contract, we recommend covering a range of variables with the vendor. Let’s take a look at some of the levers that you can use in your software negotiations.
The first component to address is the on-paper fee that your chosen SaaS package will cost your business — be this a one-off license cost or a rolling subscription.
Depending on the nature of your business, you might end up with a large tech stack draining your funding and resources each year — one study by Insivia estimates that each employee uses an average of 8.3 SaaS applications, at a cost of $2,623 per person. So, minimizing these fees wherever possible can significantly reduce your outgoings.
Even if the SaaS product you’re interested in lists a standard price on their website, this amount is subject to change. Once you’re in talks with a supplier, they’ll likely tailor your specification and advise you of added features, warranties or support programs that your business requires.
Keep in mind though that this contract negotiation works both ways, and you can often haggle the “official” number yourself for a cheaper upfront cost.
With as many as 88% of suppliers imposing an auto-renewal or “evergreen” clause in their contracts, it’s highly likely that without due notification, you will miss the renewal deadline and be immediately re-enrolled in the same contract when your current plan ends.
At first glance, these clauses might seem convenient — they could save you on the time spent renewing and prevent your team from getting locked out of business critical tools. But in reality, they can do more harm than good to the average business, with the loss of vital bargaining power.
As an example, you could lose the opportunity to re-negotiate the cost of your plan subject to the dynamic SaaS market, or scale it appropriately to your ever-changing business needs. This could leave you locked in for another year paying a high price to a service that you only need half of the bandwidth of.
What’s more, if you choose to terminate the contract early or forget to notify the provider next time round, it’s even more wasted spend.
Price protection in uplifts
Yet another small-print stipulation, SaaS contracts are often subject to built-in uplifts that charge subscribers more year-on-year. We’ve found that as many as 88% of vendors include clauses in their contracts that allow them to increase their pricing at any time — often without notifying the customer.
So, without adequate protection, this could mean that you’d end up paying exponentially more for the same products and benefits.
While SaaS prices are expected to increase annually by anything from 2 to 10%, some contractual uplifts are designed to be unreasonably large — some vendors use inflation as a scapegoat for huge price hikes, despite SaaS inflation rapidly outpacing market inflation. What’s made worse is that these price increases typically come into effect once a company is heavily invested in a particular ecosystem, making it more difficult for them to leave.
This is why it’s important to be aware of SaaS vendors potentially capitalizing on this by offering a “too good to be true” initial price and then hiking their costs after the first year.
By negotiating a maximum price cap, you can, however, ensure that you manage your future charges and won’t get any nasty surprises.
Support and maintenance
Depending on the nature of the software, its complexity, and its level of use within the business, you may require a certain level of technical support, for example 24/7 telephone support or even a dedicated account manager. You should therefore review any clauses around the vendor’s support services, as there may well be limitations you may incur additional charges should you exceed it.
On the other hand, if the software isn’t a critical business application, then it may not be worth paying for around-the-clock support and you may be able to negotiate a better price for limited support services — for example email or live chat.
During these SaaS contract negotiations, it’s also important to inquire about the systems the vendor uses for support and onboarding, as well as notable metrics such as average call response time and system downtime. Naturally, extra support or maintenance options might cost that little bit extra, but could be the difference between a critical system that works for your organization and one that needs replacing a month into a years-long contract.
Length of term
When it comes to choosing between a monthly, one-year, or multi-year commitment, there’s no right or wrong decision. It ultimately comes down to your business forecasting and SaaS usage. This means that before you commit to a lengthy plan with limited scope for flexibility, you should consider:
- How your product usage might change as time goes on
- Whether the plan accommodates this
As a rule of thumb, businesses enjoying periods of growth should avoid committing to anything longer than an annual plan, because it may be hard to predict what their needs will be any further down the line.
For example, a larger number of product licenses might be needed to accommodate a growing workforce — or even a switch to a different service altogether if operations outgrow the product.
According to a KBCM Technology Group Survey, just 11% of surveyed companies report an average contract length of three years or longer. For those that have reached a more stable level of growth and aren’t planning any drastic scaling, a longer plan might save on time and deliver loyalty benefits — but for others, it can be a risk best avoided.
Software negotiation strategies
There are a range of SaaS contract negotiation strategies that you can draw on when in talks with a vendor. Here are some of the techniques recommended by our team of SaaS negotiators.
Understand the needs of your business
The first step to an effective SaaS negotiation is to understand the different needs of the departments across your organization.
Prior to negotiations, you should discuss with internal stakeholders what they need from the service you’re looking to purchase or renew. Take a bottom-up approach and open the conversation to each line of employees that will be implicated, encouraging them to provide feedback to their department leads and use this insight to inform your negotiation priorities.
From here, assess how the necessary product fits into your wider business plan. Consider:
- The number of licenses required
- The level of support and maintenance needed
- The renewal timeline
- The potential return on investment
By walking into negotiations with a clear understanding of what your company needs, you will be better equipped to strike a deal that will present the most long-term value for your business, rather than just the lowest cost.
In fact, you may even be able to negotiate a bespoke contract based on your usage requirements. If, for example, you’re only using 20% of a product’s features, or your usage data indicates that only 70% of licenses are being utilized — the average is 67% — this insight can be used as leverage to secure more favorable contract terms.
Be generous with lead time
If you’re renewing an existing contract, you will have far more leverage over the vendor when you plan in advance. While it’s easy to become distracted by day-to-day business operations and seemingly more pressing matters, leaving negotiations until the last possible moment is a surefire way to back yourself into a corner — so it pays to think ahead.
Ultimately, the supplier will know when your plan is due for renewal and whether your business needs a quick deal in order to continue using their application, and they could well exploit this by being inflexible with their terms.
This is why it’s crucial that you’re not only aware of your renewal date, but also the amount of time you have ahead of this deadline to terminate or amend your contract. While the most common notice period is 30 days, many vendors do require as much as 90 days notice, which can require you to start planning well ahead of time.
At Vertice, we recommend starting the process 6-8 months prior to the actual renewal or termination window, in order to begin assessing your digital operations and developing a software negotiation strategy. Though this timeframe is by no means a one-size-fits-all, it should give the average small to medium-sized enterprise ample opportunity to prepare.
For bigger contracts, you may want to be starting the process even earlier — negotiations for deals between the $500k and $1m mark can take over a year to close, according to SaaStr.
Be aware of the small print in SaaS contracts
Vendors will commonly use a one-time discount to lure customers in and get them invested in their product, offering great face value with inflexible contract terms. For the non-discerning buyer, this could mean getting locked into a lengthy contract under the guise of savings, but losing those savings when subsequent prices are non-discounted. In the long run, these markdowns present little value to the consumer — demonstrated by the high average churn rate associated with aggressively discounted SaaS options.
It’s therefore important that either legal or procurement teams familiar with contract law are interrogating all language used in the document before it is signed. Don’t be fooled by inconceivably low upfront costs — they could be hiding later price increases or undesirable renewal conditions.
Use competitive comparisons
Competitor research is a vital software negotiation strategy. Ideally, you’ll have knowledge of the numbers on either side of the equation — here are the two elements to consider:
1. What are other companies being offered?
To ascertain whether you’re getting a good deal on a product, it’s wise to compare your fee and contract terms with industry peers. Naturally, however, the businesses that can provide you with the most relevant comparison are probably quite unlikely to do so — because they’re your direct competitors.
Instead, research pricing benchmarks for popular SaaS packages. At Vertice, we have an active database of more than 13,000 vendor price points, meaning we can tell you exactly how much other companies are paying for their subscriptions, giving you the leverage to negotiate better contract terms and start saving.
2. What are your seller’s competitors offering?
During the SaaS negotiation process, it’s vital to come equipped with quotes from other providers to bargain with. Without compromising your vendor rapport, you can make them aware that you’ve had discussions with other sellers offering competitive pricing or benefits.
In fact, our own team of expert negotiators often find that by simply mentioning that their competitors are also being evaluated can lead to them to drop their prices or offer more lucrative contract terms. This becomes even more of a reality if you can be transparent about the discounts you’re being offered.
Consider committing to a multi-year agreement
Almost every SaaS provider will offer a discount for signing up on an annual plan, but what many companies aren’t aware of is that many will offer even more lucrative terms for committing to two or more years.
While the starting discount for an annual plan differs across the board — usually starting from a 20% saving — data from Vertice has found that vendors will typically increase their discount by 5% for each additional year a company commits to.
If you’re confident that you will still have a need for the software two or three years down the line, then this could work to your advantage. In fact, there are also other benefits for signing up for the long haul, including time savings and protection from price uplifts.
Interrogate the figures
Asking for a detailed breakdown of where the costs in a supplier’s quote are coming from can help to elucidate what’s up for negotiation. For example, if the standard package includes a suite of features already covered by another software that your team uses, this may be an area where you can cut costs by opting out of these additional features and avoiding feature overlap.
It’s also worth familiarizing yourself with the latest SaaS inflation rates, as many vendors will use this as an excuse for hefty price increases, despite the fact that SaaS pricing inflation is rapidly outpacing market inflation. By arming yourself with this knowledge, you can be better prepared in your negotiations.
Each vendor will differ in how they offer their product — some measure usage by user or timeframe, and some deliver the product by license while others offer subscription. For the full picture, inquire about all aspects of the pricing breakdown, including:
- Software features and customization
- Maintenance and support
This way, you can fine-tune your SaaS specification to business requirements and cut out the hidden fees for features that you don’t need.
Be flexible with payment and billing terms
Committing to paying upfront can be another effective way to obtain a discount, particularly amongst smaller software providers that require cashflow.
Think about the timing of SaaS negotiations
Another tip from the experts is to renew or purchase software at either the end of the quarter or the end of the fiscal year, as the vendor will be wanting to close the deal quickly and is therefore likely to be even more flexible with the price and terms.
Let us negotiate on your behalf
Ultimately, the way to handle effective software negotiation is to plan well and consider a variety of terms beyond just SaaS pricing. The best strategies take time and a good dose of market knowledge to implement — but for us at Vertice, it’s what we do day in, day out.
With a team of experienced negotiators that know the intricacies of the SaaS purchasing process from either side of the deal and have access to a database of pricing intel, we not only know what to look out for in contracts, but we can secure you the very best deal on any software purchase or renewal.
Ultimately, we can take the burden of buying, managing and renewing SaaS off your hands, freeing up valuable time to focus on the things that matter most.