Strategic negotiating tactics

Our purchasing specialists negotiate with dozens of suppliers every day on behalf of our clients. Over the years, we’ve accumulated a wealth of knowledge and experience in buying SaaS, which we want to share with you.

Key points of concern when negotiating a new contract

New purchase

Evaluate the cost and compare it with the price of SaaS products from other suppliers.

Pay special attention to:

• Commissioning and support: What’s included and how much it costs.
• Comprehensive pricing: Break down the cost of each specific item.
• Cost implications: Determine how the cost will change with the addition of new functionality.
• Price protection: Refrain from one-time discounts or automatic renewals and allow for a reasonable markup on future renewals of 0-5%.

Renewal

Providers are interested in raising the price of SaaS instruments at renewal. That means you need to:

• Check for economies of scale: The total cost will rise over time, and there’s no surprise in that. At the same time, the terms and conditions with you as a long-term client should also improve.
• Be proactive about changing your pricing model: 80% of suppliers will change their pricing model within a year. This is done to see how it affects their bottom line.
• Expect suppliers to try to raise prices: Rates may increase if volumes decrease. The supplier will want to keep the total cost of the contract. Keep this in mind.

Basic types of licensing models

As a rule, SaaS pricing is based on the number of users, but this isn’t always the case. A common SaaS pricing model is a cost based on consumption or volume. In this case, you only pay for what you use.

1. Annual contract measured monthly

Here you make a monthly commitment for your company. However, it is often the case that a business makes a commitment with a reserve and does not use it to full scale, wasting money. Equally common is the scenario where the company exceeds the commitment and has to pay an excessive rate. We believe this is a questionable practice, as the scaling of the company should be encouraged, not vice versa.

2. Pool of Funds

This model is geared toward businesses willing to spend six-figure sums. The model itself is great because you’re not overpaying and you don’t have to pay on demand.

Each month you pay a certain amount and the provider withdraws funds based on consumption. The tricky part here is that you don’t have to track your consumption, which creates the risk of making it uncontrollable. This can cause the funds to run out earlier than planned and the contract will have to be renewed prematurely.

Expert tip

Even before the purchase, stakeholders should provide estimates for the number of users and potential usage. This will protect your budget from increasing in the future.

One-year and multi-year agreements

Which of these types of agreements is better is debatable. It all depends on the needs and goals of your business.

However, based on our experience, we can give you the following recommendations:

1. If you are the owner of a relatively small but fast-growing business, a one-year contract is more suitable for you. This will allow you to remain as flexible as possible.
2. If the supplier doesn’t provide a discount for regular partners, choose a one-year contract.
3. If the implementation of a SaaS tool can potentially take more than 3 months, consider a two-year contract. Switching to another solution, in this case, may take too long.
4. If you already know what your chosen product is and you have experience with it sign a contract for several years. If you have no experience with the product, limit the contract to one year.
5. A multi-year contract will save you a lot of time in negotiating about renewal.
6. If you don’t think SaaS management will be able to provide a certain percentage of renewals, opt for a multi-year contract.

Expert tip

A strategy with multi-year contracts is good for scaling. It will save your legal, finance, and security departments time reviewing contracts. Even if some of the SaaS tools become obsolete or no longer fit your business needs over time, competitors of those solutions can always buy out your contracts and offer you better terms.

How do you know that the price you are being offered is fair?

If you don’t have a company that can quote you the best price based on statistics and experience, we suggest you use the three-bid and a buy method. This will increase the chances that the price you are offered is fair.

Of course, some vendors give you their best offer right away, and haggling with them makes no sense. This is also true if the supplier knows for sure that the product is unique and that you have no way out. However, we’ve seen cases where the supplier is willing to reduce the price by up to 90% if you do everything right.

You can also find out how fair an offer is in the industry-related communities. For example, you can contact the Slack groups or ask the audience on Capiche.

Everything is clear, now let’s implement it!

Now you know the main rules of purchasing SaaS. It’s time to put this knowledge into practice.

Contact us and we will perform a free analysis of your SaaS infrastructure and explain how we can establish a fruitful cooperation and help you save money.

The correct process for buying SaaS

Step 1. Four nods of approval policy

When you create the SaaS purchase process from scratch, you need to establish a policy of 4 approvals from each of the responsible departments. This way the stakeholder will know exactly who to contact in the event of license purchase or renewal.

These 4 approvals should be documented and stored in one place, e.g. on the company intranet.

1. Department Heads

Each team should have a person in charge at the department head level. This includes the head of marketing, sales, etc.

No purchase should be made without the approval of the appropriate department head.

2. Finance

Before making a purchase, the stakeholder must check with the appropriate person whether the company has the funds to do so. You should appoint a responsible person to oversee and approve such requests.

This is usually the VP of finance for companies with up to 250 employees, FP&A for 250+, and procurement for larger companies.

3. Security

Buying a new SaaS solution should not jeopardize the security of your company. Moreover, you have to make sure it is compliant (i.e. SOC 2 compliance, SSO requirements, etc). You need a dedicated person to check the potential software for compliance.

Talk to your IT/security/DevOps team and they’ll tell you who is best suited for this role. Typically the Head of Information Security will do.

4. Legal

The final step is to approve the purchase of the SaaS tool from a legal standpoint, drafting and approving contracts. This can be done either by an in-house lawyer or by an outside specialist hired by your firm.

Keep in mind that this step usually takes the longest amount of time. The stakeholder should be aware of this.

Expert tip

Too many approvers is generally a bad idea. Of course, in more traditional organizations, such as banks or government agencies, there will inevitably be more than four of them. Nevertheless, experience shows that four key people for approvals is the optimal number to purchase in the shortest possible time and therefore get the best price.

Step 2: Determine timing and cost implications

A good buying process means a set of clearly defined sequential steps for both the immediate purchase of a SaaS tool and for renewals. If the process is clearly outlined in internal documents, it will save all parties involved time and money in negotiations. We recommend structuring it as follows:

1. The responsible SaaS manager should begin negotiations and initiate the process 90-120 days before the purchase. This is especially true in the case of auto-renewals.

2. Understand the time and financial implications in the event of a vendor change. The stakeholder should contact the supplier representative and let him or her know that the company is considering a contract extension and evaluating the potential benefits of this decision.

Note the wording. There should be a special emphasis on “evaluating.” This will let the supplier know that you aren’t only considering their product, but that you are going to take their offer to the market to get competing offers. This is a very important step because SaaS companies are interested in getting more and more money from you over time.

Step 3: Stakeholders should evaluate the SaaS tool before asking for a budget

Finance managers should ask stakeholders what alternatives are available to the solution being asked for and how much do they cost. In turn, at least three SaaS tools should be named, the benefits of each, and the ratio of potential revenues from implementation to costs.

The most common approach is “three offers and a buy”. This means getting at least three offers from competing vendors and making a decision based on that data.

Regardless of your personal preferences or team advice, you need to make it clear to the vendor representatives that you have options to choose from.

Step 4: Set spending thresholds

You need to set spending limits. Going beyond them should imply approval with additional individuals. Here you need to use common sense and let people make purchases that will allow them to do their jobs quickly and well, but at the same time will not drive your firm to ruin.

For example, you can instruct the vice presidents of finance to approve expenditures under $100,000, and only allow spending beyond that line with the personal approval of the CFO.

Get all the approvers together in one email or Slack thread before you directly sign off on the purchase decision. This is to speed up the decision-making process as much as possible.