Navigating a SaaS contract negotiation requires patience and a keen eye for detail. This legal agreement between vendor and buyer isn't just a formality—it's a sensitive document defining your software usage terms, service levels, and legal obligations.
Overlooking or mishandling contract negotiations can lead to revenue loss, operational hassles, and security vulnerabilities for both parties. Negotiating is essential for securing the best value and ensuring alignment between your team's needs and the vendor's offerings. Yet, many SaaS buyers fumble at this stage, potentially resulting in escalated spending and poor ROI.
While the intricacies of negotiating SaaS contracts might seem daunting, it is pretty easy to get a hold of them. This guide provides the insights and strategies essential for acing SaaS contract negotiations.
Whether you're a seasoned negotiator or new to the world of SaaS procurement, this article will provide the knowledge to navigate the complexities of negotiations and help you negotiate SaaS contracts confidently.
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 sold overpriced products to them during contract negotiations.
We've listed some mistakes we noticed in their contracts:
Despite months of renegotiations, our customers could not minimize the prices, downgrade the pricing tier, or right-size their licenses.
Then, our SaaS buying experts helped our customers by negotiating with the vendors based on the usage data and pricing benchmarks and reworking some of the agreement clauses, resulting in cost savings.
Consider SaaS contracts as a bilateral arrangement. Your negotiation skills can significantly influence the amount of control you have over the contract. Better negotiations will help you secure favorable deals and maintain a good vendor relationship.
When we talked to Dave Beckwith, the Vice President of Global Procurement & Endpoints at 8x8, about SaaS contract negotiations, he quoted:
“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 and negotiate for only what you need. Doing so will help you stay in control during negotiations. Don't let the vendors gain the advantage in the contract.
Poor 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 great at negotiations, and most organizations, especially SMBs, undermine their expertise and pay 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.
You need to enhance your negotiation skills and have relevant data at your disposal for effective negotiation leverage to secure the right deal.
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 regret it throughout the contract term.
Lack of alternatives
Before entering negotiations, conducting a competitive analysis and shortlisting a handful of potential alternatives that align with your needs is essential. You can use them as negotiation leverage, or having a backup plan will make you more confident during negotiations.
A lack of alternatives might result in choosing a vendor that doesn't entirely align with the organization's long-term strategy or evolving needs. This decision can lead to vendor lock-in, making switching or integrating other solutions challenging.
No price benchmarking data
Most organizations make the mistake of not knowing what their peers are paying for the same product and end up spending more on the application. You should perform a market analysis and identify the latest pricing benchmarks.
Without benchmarks, vendors may take advantage and set higher prices than the industry standard. Not understanding market rates can cause organizations to mishandle budgets, either overspending or not maximizing funds for enhancing the SaaS solution or adding more features.
These are some significant challenges organizations face during SaaS contract negotiations. Nailing these three will enable you to sign the best possible contract with the vendor.
How do you negotiate SaaS contracts with vendors?
Perform thorough research on the vendors
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 simplify things, here is a table showing the difference between good and bad vendors:
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 to “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.
However, the team will leave the surplus licenses unused, 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 a Service level agreement 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.
Buyers should review the SLAs carefully. 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 impact your bottom line positively.”
“We purchased 100 licenses for a product, costing us $178. "And the requirements 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 clarify with the vendor and understand their exit clauses if 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 must 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, so it is essential to clearly define them in the contract during the vendor negotiation process. This will help you avoid future surprise penalties or lapses in data migration.
Essential Questions to ask while negotiating SaaS contracts with vendors
1. Service Level Agreements (SLAs)
- What are the guaranteed uptime and response times?
- Are there penalties or credits for service interruptions or surplus usage?
2. Data Security and Compliance
- How is data protected, and where is it stored?
- Does the vendor comply with industry standards and regulations (e.g., GDPR, HIPAA)?
3. Scalability and Flexibility
- Can the software scale according to our growing needs?
- Are there provisions for upgrading or downgrading subscriptions as needed?
- Will there be a pricing increase when we scale up?
4. Contract Duration and Termination
- What's the contract duration, and are there exit clauses or penalties?
- What happens to our data upon contract termination?
- Is early termination free from penalties?
5. Cost Structure and Transparency
- Are there hidden fees or extra charges beyond the stated pricing?
- Can the pricing be adjusted or negotiated based on usage or specific requirements?
6. Support and Maintenance
- What level of support is included, and during what hours?
- Are there additional costs for support beyond the standard package?
- Is there any charge for onboarding support?
7. Updates and Enhancements
- How frequently are updates released, and how are they managed?
- Are enhancements included, or do they come at an extra cost?
8. Vendor Viability and Performance
- What's the vendor's financial stability and track record?
- Are there any performance metrics or customer satisfaction ratings available?
9. Ownership and License
- Who retains ownership of the data stored and processed within the software?
- What are the license terms, and can it be transferred if needed?
CloudEagle for SaaS contract negotiations
Vendor negotiation is crucial to purchasing the right product at the right price. Business owners and procurement leaders often mention that their teams have 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. Here's how we helped Wefunder negotiate with their vendors:
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 the right product at the right price.
Our on-demand negotiation experts will provide insights on your usage, market data, and competitive insights. You can engage with them anytime and use their insights to negotiate with the vendor.
Or you can leave the entire process to our team. They’ll take over the negotiation process, leverage benchmarks and discounts, and secure the right product at the right price. We have saved more than 1000 hours in negotiations for organizations and realized millions in savings.
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 discusses 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.
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 save on SaaS spend.