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How to negotiate SaaS contracts?
Many SaaS vendors obsess over monthly or annual recurring revenue growth to establish a critical mass of customers.
Keep this in mind when negotiating SaaS contracts, renewals, or True-ups as you can get discounts for an extended period of time.
Some SaaS providers are also open to “grandfathering” an existing customer in order to reduce churn.
By understanding the intrinsic value levers and supporting negotiation conversations with actual usage data for each vendor, leaders can land attractive pricing and terms. Just build a case and ask.
📚 Related: Microsoft EA and True-Up Renewal
1. Prepare for negotiations
Before entering SaaS contract negotiations, organizations should follow these steps to prepare and arm themselves with the necessary information:
- Assess organizational needs: Identify the specific requirements of the organization and highlight the goals of the SaaS implementation.
- Research potential providers: Gather information on different SaaS providers and their offerings to understand which vendors align best with your needs.
- Budget considerations: Establish a budget for the SaaS solution and be prepared to discuss pricing in negotiations
- Define negotiation objectives: Set clear objectives for the negotiation and establish any non-negotiable terms or conditions.
2. Apply pricing components
Consider the following examples where your awareness of a vendor’s pricing rationale and business goals could result in more favorable contract terms.
Understand SaaS vendor license types
More often than not, companies deploy enterprise-grade apps with unnecessary features. This is common with vendors, such as Office 365 which offer many different types of licenses. To avoid this, build a baseline of user needs and right-size licenses based on the features and functionality needed.
Consider term discounts
Vendors need consistent cash flow and want to avoid customer churn. You can use this information when negotiating your SaaS agreement and get attractive discounts. Once you’ve identified your mission-critical apps, you can consolidate multiple SaaS contracts and propose a longer-term service extension.
Ask for loyalty discounts
Similar to term discounts, vendors care about the long-term value (LTV) of SaaS contracts. Funding, valuation, and Wall Street interest are all connected to contract value for SaaS companies. With this info in your back pocket, you can determine your longest-tenured relationships and ask those vendors for loyalty discounts.
Fear of churn
The SaaS model typically requires heavy investment in customer acquisition while the cost of keeping an existing customer is relatively low. If a SaaS vendor has a low lock-in with your company and there are good alternatives, use your bargaining power to get loyalty discounts.
Consolidate for vendor discounts
With SaaS management platforms, you can quickly find redundant SaaS apps. In this step, you can consolidate app functions to a single vendor to increase your license need and leverage for negotiation. Just ask your preferred vendor for volume discounts and compare them with competitors.
Logo power
If you work for a well-known company with great brand recognition, leveraging your logo power can get you a good discount. Many SaaS vendors have special accelerators in place. These are set to motivate sales teams to close high-profile industry names as they seek to build their category leadership in the market.
3. Negotiate risk and security components
When negotiating SaaS agreements, remember that security and risk components are not set in stone. They can be adjusted to meet your needs – at least to some extent.
To ensure that the security clauses in SaaS contracts protect you in the best way possible, take a look at the tips below.
- Create a master list: Before starting a SaaS contract negotiation, create a master list of all risks that are relevant to your organization. In general, the bigger your planned service procurement, the more leverage you’ll have with the vendor.
- Communicate the non-negotiable: Call your security team early on when negotiating SaaS contracts. That way, you ensure that non-negotiable security risks around data protection are covered before a SaaS solution is purchased.
- Get additional protections: You can ask your vendor for additional protections. This could include language protecting you in case of a vendor acquisition or a vendor’s cybersecurity provisions.
- Insist on early breach notification: When negotiating SaaS contracts, it’s advisable to include clauses that ensure prompt breach notification. This might be the most difficult point to negotiate as vendors don’t like to be pinned down to a specific timeline.
4. Closing the deal
The final stage of SaaS contract negotiations involves finalizing and formally closing the deal. These final steps include:
- Review the final contract: Ensure that all agreed-upon terms are accurately reflected in the written contract.
- Consult legal counsel: Involve legal professionals to review the contract and ensure the organization's interests are protected.
- Obtain approval from stakeholders: Present the finalized contract to key stakeholders within your organization for approval and buy-in.
- Sign the agreement: Once all necessary approvals have been obtained, proceed to sign the contract and establish the formal partnership.
📚 Related: 6 Best SaaS Renewal Practices
Best practices
- Do your homework: Thoroughly research the SaaS provider's offerings and alternatives in the market to establish a solid negotiation position.
- Use data and benchmarks: Reference industry standards, competitor offers, or relevant case studies to support your demands and requests.
- Focus on value, not just cost: Emphasize the value that the SaaS solution will bring to your organization, and consider value-added services like support and training.
- Be prepared to compromise: Approach the negotiation with flexibility and openness, as both parties may need to make concessions to reach a mutual agreement.
- Maintain a strong partnership focus: Foster a collaborative relationship with the SaaS provider, aiming for a partnership that benefits both sides.
📚 Related: Best SaaS Contract Management Practices
Conclusion
Managing SaaS contracts and agreements is a complex task that not only requires negotiation skills, but the visibility of your SaaS application landscape and a clear understanding of your leverage, your company’s needs, and how these needs can be protected.
SaaS management platforms are the most efficient way to streamline and manage your SaaS contracts, optimize your cloud spend, and stay in control of your data.
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