A SaaS contract is a legal agreement between a vendor and the buyer. It outlines the terms and conditions for using the software. It also includes crucial elements like SLAs, legal clauses, and policies that the SaaS vendor and the buyer must adhere to.
A SaaS contract gets the maximum attention during the vendor negotiation process. A small mistake here can lead to severe revenue and security lapses for both the buyer and the vendor.
Often, SaaS buyers overlook the SaaS contract negotiation process. Their poor negotiation performance leads to increased spending and, in some cases, security risks.
Negotiating SaaS contracts might seem complex, but with the right help, you can ace it. That’s why we created this article to show you how to negotiate SaaS contracts.
SaaS contract negotiations: why you shouldn’t avoid them?
Often, our customers talk about their increased SaaS spend and how they have no control over it. Upon deeper analysis, we identified how SaaS vendors oversold them during contract negotiations.
We've listed some mistakes we noticed in their contracts:
Despite months of renegotiations, our customers were unable to minimize the prices, downgrade the pricing tier, or right-size their licenses.
Then our SaaS buying experts intervened and leveraged the usage data and pricing benchmarks to lower their prices. They canceled the auto-renewal policy, and unused licenses which led to increased SaaS savings for our customers.
Consider SaaS contracts as a bilateral arrangement. Your negotiation skills can greatly influence the amount of control you have over the contract. Supreme negotiations will grant you an advantageous position over the vendors and make it easier to negotiate in the future.
When we talked to Dave Beckwith, the Vice President, Global Procurement & Endpoints at 8x8, he said:
“SaaS vendors will play a shell game and go to extreme lengths to get you to purchase more or agree to their demands,” Beckwith added.
It is necessary for you to use the best practices. Doing so will help you to succeed in your vendor negotiations. Don't let the vendors gain the advantage in the contract.
Avoiding SaaS contract negotiations will lead to the following:
- Poor buyer control over the contract
- Non-refutable auto-renewal policies
- Increased spending due to surprise price changes by vendors
- Lack of customization and limited flexibility
- There are no opportunities for discounts or savings.
Now that you know why you must not avoid SaaS contract negotiations, read more to find out how to negotiate SaaS contracts in the right way.
Challenges organizations face while negotiating SaaS contracts
Understanding the high-level challenges organizations face during contract negotiations will make it easier for you to overcome them.
Poor internal communication
Before entering vendor negotiations, the procurement team must possess relevant details about the requirements and the allocated budget. The IT team must also verify that the soon-to-be-purchased application doesn’t have overlapping functionalities with an existing application.
In most companies, procurement teams enter negotiations without any requirements or budget details. As a result, they often make the mistake of procuring an excessive number of licenses or insufficient ones.
Lack of negotiation expertise
SaaS vendors are masters of negotiations, and most organizations, especially SMBs, undermine their expertise and end up paying for it later. The balance of power between the vendor and the buyer should be equal for a smooth contractual agreement.
Previously, we showed you what happens when a vendor overpowers you during contract negotiations. You’ll end up paying more for an application than your peers and might miss out on signing crucial SLAs, data, and security clauses.
Choosing the wrong vendor
Better control over a SaaS application, optimized spending, no-hidden pricing, healthy relationships, etc., depend on choosing the right vendor. If you don’t pay enough attention during the SaaS vendor selection process, you’ll be the one regretting it throughout the contract term.
These are the three major challenges organizations face during SaaS contract negotiations. Nailing these three will enable you to sign the best possible contract with the vendor.
How to negotiate SaaS contracts with vendors?
Perform thorough research on the vendors
Let’s start where we left off in the previous section. A smooth contract negotiation boils down to one ultimate step: choosing the right vendor. Conduct thorough research on vendors, and you can use a vendor research platform to make this process quick.
Read reviews, talk to their customers, do social listening, and analyze the vendor's reputation before you select them. Leverage price benchmarks; check how much your peers are paying for the vendor’s application. That’ll show you their pricing strategies.
You must know how often the vendor alters tier pricing plans; if it is frequent, you must stay away. To make things easier, here is a table showing the difference between a good and bad vendor:
So, before you start negotiating SaaS contracts, ensure that you’ve chosen a vendor that is open to discounts, trustworthy, and more approachable for renegotiations.
Leverage your requirements
When negotiating SaaS contracts, the golden rule is “stick to your requirements.” Clearly define what you need and your budget, and bring the vendors on the same page, not the other way around.
SaaS vendors will follow a playbook, asking you to purchase more licenses to get discounts. This is where most procurement teams fail. They go overboard and purchase surplus licenses for a discounted price.
But the surplus licenses will be left unused by the team, leading to poor ROI, and the team will wait for the next renewal window to eliminate unused licenses. Then, when the window arrives, the vendor will cite inflation and increase their pricing plans. The cost savings you dreamed of will never see the light of day. This is the case in most contract negotiations.
So, clearly understand how many licenses your team needs and the allocated budget, and negotiate only for them. Promise a long-term contract if the vendor isn’t open to your demands.
Experts say that SaaS vendors are more open to your demands if you promise them a long-term agreement. A win-win situation for both parties.
Build a healthy relationship with the vendor
This is where choosing the right vendor will come in handy. Sometimes it's not about the money. Try building a healthy relationship with the vendor during contract negotiations.
Even if you didn’t get the best deal during the contract signing, you can continue engaging with the vendor and get them to lower their pricing during future renewal negotiations.
A strong vendor relationship can lead to more buyer-favorable contract terms. Vendors who value you as a trusted partner will be more willing to offer flexible pricing or customized solutions to meet your needs.
Here are some advantages to building a healthy vendor relationship:
Don’t go in guns blazing during vendor negotiations. Try to have a smooth conversation with the vendor without focusing on the price. Remember, SaaS applications are subscription-based, so you’ll always have time to renegotiate during renewal windows.
Or, if you negotiate skillfully and promise a long-term agreement, the vendor might be open to more discounts and scalable pricing options.
Negotiate the SLAs and other clauses
A SaaS vendor is supposed to sign an SLA with the buyer. It necessitates the level of service that the vendor is obliged to provide. It includes the scope and quality of the service, uptime guarantees, resolution time, performance metrics, penalties, etc.
SLAs also include crucial clauses. Without these clauses, you cannot expect accountability from the vendors or liability in the event of data breaches.
It is advisable for buyers to carefully review SLAs. They should also seek legal advice. This will ensure that the contract adequately addresses their needs for accountability, service levels, and liability during the contract negotiation process.
Here are some of the key clauses included in SLAs:
- Standards of service
- Limitation of liability
- Term and termination
- Legal and regulatory compliance
- Data security and privacy
Pay attention to SLAs while negotiating SaaS contracts. Have your legal team or a lawyer by your side to review all the clauses and agreements that the vendor states. You can add a new clause or remove any based on your requirements.
Opt for slab-wise pricing
We asked Jinendra Jain, the Global head of Finance at Tiger Analytics, how negotiation can benefit the team.
He added, "You should always be willing to negotiate with the vendor if you want to positively impact your bottom line.”
“We purchased 100 licenses for a product, costing us $178." And the requirement from the team increased to 4000 licenses, so we decided to switch to an enterprise-tier plan. "And then when we negotiated for an enterprise label, we brought down the pricing from $178 to $48 for the same 100 licenses,” says Jinendra Jain.
Let us rephrase Dave Beckwith: “Do not shy away from contract negotiation.” Opportunities for cost savings will always be open during vendor negotiations; it is up to you and your negotiation skills to grab the opportunity.
And as far as pricing plans go, “Do not pay upfront; it’ll minimize your negotiation leverage and affect your ROI too.” "Always opt for a slab-wise pricing plan, negotiate with the vendor, and do short-term building,” says Jinendara Jain.
Choose slab-wise or usage-based pricing plans because you’ll have better control over your spending. Tracking ROI will be easier. It’s more suitable to continue in the long term. A win-win situation between buyer and vendor.
Clearly define your exit plan
Some companies consider it too early to discuss termination while negotiating SaaS contracts. They are so wrong. You should make it clear with the vendor and understand their exit clauses in case things don’t work out well.
You need to ask the right questions here.
- What’s the penalty if I terminate the contract too early?
- What is the notice period for termination or non-renewal of the contract?
- Will I retain ownership of the data after the contract is ended?
- During the transition period, will I be able to continue using the services?
- Will the vendor assist with data migration?
- What happens to the data that the vendor collected during the contract period? Will it be erased or just used for marketing purposes?
These are some of the questions you need to answer while negotiating SaaS contracts. And all the responses must be mentioned in the contract for better accountability.
These kinds of termination policies exist in the market, and that is why it is essential to clearly define them in the contract during the vendor negotiation process. This will help you avoid surprise penalties or lapses in data migration in the future.
How to negotiate with vendors as a startup?
The one question we always get during webinars and while conversing with customers is, "How do I negotiate with SaaS vendors as a startup?
As a startup, the major constraint you have is your budget. Vendors will also be aware of your budget constraints, but they will be more concerned about your credibility and the potential longevity of your business.
Leverage your potential growth
Use one of the strategies we discussed above and try to create a healthy engagement with the vendor. Considering your budget constraints, you’ll ask for a discounted price from the vendor.
SaaS vendors are often open to discounts if the buyer promises a long-term commitment of 2 or 3 years.
Highlight your business plan, market potential, and scalable operational strategies to demonstrate the growth trajectory of your startup. Emphasize building a long-term relationship and how they can benefit from your growth.
SaaS vendors love startups, as it gives them an opportunity to become strategic partners. It opens the door for upselling as you scale your business.
Ask for discounts
Now that the vendor knows they can build a long-term partnership with you and scale the pricing plans as your startup grows, bring up your budget constraints.
Clearly outline your financial limitations and opt for a flexible or slab-wise pricing structure where you only pay for what you use. This pricing plan will give you more flexibility and control over your spend and budget.
When we asked business leaders and financial experts during our exclusive power lunch meet, here’s what they added:
While negotiating SaaS contracts, provide details on your growth trajectory and projected user base. This will help the vendor understand the potential value they can earn from your partnership and encourage them to offer more favorable pricing terms.
Also, don’t forget that it is not always about the price. While negotiating a discounted price, consider your vendor’s perspective too.
Discuss how you can help the vendors by acting as a reference customer, providing testimonials or case studies, or participating in beta testing for new features. Become a brand advocate for the SaaS vendor by joining their referral program and bringing in valuable customers.
Value for a value
While talking to one of our startup customers, they revealed an exciting strategy they used while negotiating SaaS contracts.
Apparently, our customer was negotiating with the vendor but could not convince them to offer a discounted price or flexible pricing plans.
So, instead of ending the negotiations, they leveraged their product and initiated a proposal for it.
“Our product’s monthly plan was $32.50/month for 5 users." We proposed to offer the same plan for $15/month for 5 users, and we also threw in some add-ons. "And we instantly got a positive response from the vendor,” added our customer.
In response to our customer’s proposal, the vendor agreed to offer their product at a discounted price. “We still use the application, and now our partnership is stronger than ever,” added our customer.
So, if the vendor is not open to negotiating their pricing, propose a mutual-swap arrangement, your application for theirs. This tactic will only work if your product is valuable enough to solve the vendor’s pain point, so it is worth a try if you’re a startup.
Advantages you have as a startup while negotiating SaaS contracts
SaaS vendors are aware of your budget constraints but also know how startups are flexible and how they can quickly adapt to market changes. You can use this as an advantage, negotiate flexible/discounted pricing plans, and customize the pricing tier based on your needs.
You can exchange your product at a discounted price for the vendor’s product. This will be mutually beneficial for both parties, which is something that enterprise products cannot achieve.
Potential for strategic partners
Unlike enterprises, startups can position themselves as strategic partners with vendors rather than customers. SaaS vendors will prefer this too, as your partnership will help them increase word of mouth and enable both parties to achieve mutual goals together.
Unique value proposition
Startups are knows as "high-growth markets," and they bring unique perspectives and ideas to the market. You can use this to position yourself differently from your peers/competitors and show the vendors your uniqueness.
This will help the SaaS vendor understand the unique value they can get by partnering with you. They will be more inclined to meet your demands for your unique value proposition.
For example, let’s say you’re a startup that recently secured $20 million in Series A funding. Now, by being a strategic partner with you, your vendor can position themselves as a key player in the success story of a high-growth startup.
Through this partnership, a SaaS vendor can get the following:
So, if the SaaS vendor asks, “What can I get by partnering with a startup like you,” let them know these benefits during negotiations and secure the best possible deal.
CloudEagle for SaaS contract negotiations
Vendor negotiation is crucial to purchase the right product at the right price. Business owners and procurement leaders often mention that their team has insufficient time to negotiate effectively with vendors. This can lead to increased spending, auto-renewals, and security risks.
If your lean team lacks the bandwidth to negotiate with the vendors, you can seek assistance from CloudEagle’s SaaS buying experts.
Our experts have decades of negotiating experience and can negotiate on your behalf to get the vendors to agree to mutually beneficial demands.
SaaS buying experts at CloudEagle can help businesses purchase the right amount of licenses within their budget. They will analyze the business's requirements and leverage price benchmarking data to purchase right product at the right price.
SaaS vendors will expect buyers to purchase the product at the list price. However, through effective SaaS contract negotiations, you can persuade the vendors to offer discounts and flexible pricing plans for their applications.
You need to follow the right strategies while negotiating SaaS contracts. This article discussed what you must do during vendor negotiations to secure the best possible deals.
These are the tactics that procurement teams use while negotiating with vendors. Follow these techniques to ace your negotiations and purchase the right product at the right price without frustrating the vendors. And we also showed you how to negotiate with vendors as a startup.
But suppose you think your team lacks the bandwidth to negotiate. In that case, CloudEagle’s on-demand SaaS buying experts are readily available to negotiate on your behalf and help you purchase the product easily.
So, what are you waiting for? Talk to our experts to simplify contract negotiations and start saving on SaaS spend.