Eldar Tuvey
The current state of affairs paints a concerning picture for SaaS buyers.
Our data shows that the SaaS inflation rate is around four times higher than the general market inflation rate. Specifically, SaaS expenditure in the U.K. and Australia is currently growing at a rate five times higher than market inflation — and in the U.S., a substantial 3.5 times more.
These would be worrying figures in any economy, but for CFOs attempting to drive growth during an economic downturn, soaring software costs should be ringing alarm bells.
One of the reasons that SaaS vendors are able to increase their prices year after year is that so many obscure their pricing information. As a result, buyers lack the insight to negotiate best-in-class deals on their software contracts.
Without a frame of reference on what other companies pay, many are quoted higher rates for enterprise-level software subscriptions. So much so that our data indicates that as many as 90% of companies are overpaying for their SaaS products by 20%-30%.
What can you do?
Vendor pricing is rarely set in stone, and buyers have more purchasing power than they realize when they approach negotiations and are equipped with leverage. When your company reaches out to sales teams to inquire about SaaS solutions, there is often room to negotiate the contract.
Finance and procurement teams need to be aware of the negotiation tactics that can be used to attain SaaS products at a better price and avoid the common pitfalls associated with software negotiation. If you’re looking to cut your software costs in 2023, these are the strategies that are recommended for securing SaaS contracts with long-term value.
Give yourself enough time to prepare
The first step in gaining negotiation leverage is to allow yourself time.
Ensure that you approach a vendor to renew or take on a brand new contract far before you plan to onboard with the new product. Before anything else, you’ll need to understand your needs and comprehensively research which tools are best equipped to fulfill them.
To help you on your way, put together a short list of tools and consider:
- The number of licenses the company requires.
- The level of support and maintenance needed.
- The features that you deem essential and those that would be “nice to have.”
- The budget you are willing to allocate.
This way, you can enter negotiations with the knowledge and time you need to secure the best deal. If you fail to take this time, your supplier could realize that you need a quick turnaround and respond with inflexible terms. Though there is no one-size-fits-all solution, we typically advise that the average company begins the procurement process six to eight months before contract renewal.
Consider your contract length
One technique that vendors use to entice customers is a one-time discount that will make their first bill deceptively cheap. These typically boast greater face value than other contracts but tend to be offered in exchange for terms that might not work for every company.
This could mean getting locked into an unfavorable contract under the guise of savings and potentially seeing price increases down the line once you’re fully invested in a particular tool’s ecosystem.
Some providers will discount their prices in exchange for a longer subscription. Multiyear contracts can benefit companies who know their usage patterns and strategically negotiate for longer-term discounts. That said, it’s worth noting that only 14% of organizations subscribe to contracts averaging three years or more. Most businesses are better off subscribing on an annual or monthly basis instead.
If you’re experiencing rapid growth, these shorter contracts tend to offer more flexibility to scale and switch between tools as needed, rather than wait around for your contract to expire or pay out for early termination.
Interrogate contract clauses
Beyond just the upfront fee, there are a specific number of contract terms that can affect the long-term cost and net return on investment.
These are some of the common contract clauses to watch out for:
Auto-renewals
“Evergreen” renewal clauses are all around us, popping up in payment plans for Netflix, Spotify and even our mobile phones. Our research shows that 89% of SaaS vendors feature these clauses as part of their contracts. But few buyers realize that their removal can be negotiated.
By removing or adjusting an auto-renewal clause, you can ensure that you won’t be caught off guard and made to commit to another term of subscription without due consultation. Even if a vendor won’t completely remove the auto-renewal clause, you should consider requesting notification within a designated window prior to renewal.
Company needs are dynamic and ever-changing, so ensuring that you aren’t automatically re-enrolled can provide crucial bargaining power to adjust the terms of your subscription or terminate the contract.
Price uplifts
As SaaS prices continue to inflate, many vendors reserve the right to charge their buyers more at each renewal. This is because of price uplift clauses built into their contracts. We have found that as many as 88% of suppliers include these terms, which allow them to increase their pricing at any given time without notifying their customers of the new charges.
However, price uplift clauses represent another “small print” term that can be adjusted at negotiation. You can achieve a significant level of price protection by requesting a maximum price cap from your provider, preventing any future uplifts from exceeding a certain level of increase over your existing plan.
Use price benchmarking data
One of the most effective negotiation strategies is to conduct thorough competitor research. If you can seek out several different price points or quoted figures from a vendor’s competitors, they will be more likely to provide a counter-offer to ensure your business.
While you don’t want to compromise your rapport with a bidding war, making it known that you’ve been offered a lower price elsewhere could prompt discounted offers. The truth is, quoted prices can vary wildly — we have seen examples of disparity so extreme that two separate companies were respectively paying $50,000 and $13,000 for nearly identical software subscriptions.
It’s also productive to investigate the prices that your vendor has offered to your industry peers. While many enterprise-level plans are tailored and the exact contract terms can differ from case to case, approaching negotiations with a general outline of what other companies pay will help to uncover whether you’re getting a good deal.
These techniques are similar to those that vendors themselves use in the sales process. It’s common practice for suppliers to research and gather information about a buyer’s company budget, decision-making and timelines for the fiscal year. By compiling your own data to leverage in negotiations, you level the playing field to strike a deal that both parties will benefit from.
The bottom line
If cutting SaaS costs is a top priority for your business in 2023, improving your software negotiation strategy is the place to start. Whether you’re renewing your existing contracts or procuring new tools, an iron-clad negotiation plan should include:
- Generous lead time.
- Discount scrutiny.
- Clause interrogation.
- Leveraging of pricing data.
Negotiating each of the contracts that make up your SaaS stack will provide long-term savings by mitigating the effect of rising prices. This way, your organization can get ahead of the curve and escape the fate of being one of the 90% of companies overpaying for their SaaS by up to 30%.
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