How to Negotiate with SaaS Vendors

To execute a successful SaaS deal or renewal, it is imperative to prepare six to twelve months in advance. This is the time needed to build a strategy and timeline of activities that revolve around the creation and preservation of leverage, which will allow the buyer to approach the vendor from a position of strength. Below is a set of proven, repeatable steps for planning and executing a successful SaaS deal.

Develop Deal Options, a.k.a. Plan Bs

It’s easy to create deal options when making a brand-new SaaS purchase, but as a vendor becomes entrenched, it’s nearly impossible to replace an entire platform – and the vendor knows it. So, if the vendor believes you are locked into their solution, you must work hard to build and preserve leverage in the following ways:

  • Consider a one year vs. a multi-year deal. SaaS sales reps are paid on net-new revenue achieve in a deal and are awarded bonuses on longer-term deals. If a deal calls for significant new spend, a multi-year deal will serve a “commission multiplier” – a lucrative outcome for the sales rep. In other words, your rep will be motivated to keep you from a signing a one-year agreement, and therefore more open to granting concessions to make this happen.

  • Use low- and high-growth scenarios to incentivize the sales rep. We recommend starting negotiations off with a low growth option, and later use any high growth options as deal “sweeteners” to get the rep to hit your deal target. This works well when you do not need the higher growth option but would consider it if it included your desired terms for pricing and contract language.

  • Consider what products the rep is trying hardest to sell. Higher commissions are often awarded on specific solutions the vendor is pushing – such as the latest release or products acquired via acquisitions. We advise clients to leverage deal options that include these types of products to motivate sales reps to provide better discounting or contract terms.

  • Pull the deal forward or push it back. Sales reps are driven by quotas tied to key fiscal dates such as year ends and quarter ends. Moving the timeline is an effective way to motivate the sales rep to provide concessions. Preparing early lets you play with multiple dates and maximize your ability to build leverage during negotiations.

  • Examine different deal structures and licensing models. Most SaaS reps are commissioned on a net-new spend accrued in Year One of a contact, but customer plans usually project growth in later years of the agreement (in a ramp deal structure). Therefore, SaaS reps are motivated to sell bundled enterprise licensing agreements (ELAs) because these deals allow the rep to manipulate how costs are distributed in each year of an agreement, and shift much of the spend to Year One to maximize their commission. Customers can leverage different deal structures and licensing models as an added negotiation lever to compel the rep to behave in their favor.

  • Introduce viable competitors. Although replacing an entire SaaS platform is rarely a good option, there are major threats to individual components offered by other vendors that can be used to establish leverage. The chart below shows popular SaaS solutions that could be used against the leading suppliers.

Control Deal Information

SaaS vendors are experts at obtaining key information surrounding your deal, because it effectively eliminates their uncertainty and your leverage. To avoid Information leaks, it’s essential to proactively plan and educate your organization exactly what information can and cannot be shared.

  • Align your team and executive stakeholders on your deal strategy and convey that they must not share any information with vendors regarding your budget, demand forecast, go-live deadline, or competitive options. Send a “hush letter” explaining the importance of keeping all deal information confidential.

  • Have all communications with the supplier flow through a small team.

  • Prepare attendees of any SaaS tech conferences or events to not discuss confidential information and offer ways to answer probing questions.

  • Remove badge access for any sales reps that have access to your premises.

Develop a Compelling Message

Sales teams test the buyer’s story for consistency across all points of contact. When negotiating a SaaS deal, it’s important to present a unified message across every group that interacts with the sales team, and deploy a message is that is credible, consistent, and has a positive impact on your leverage. This type of message must include the following:

  • Motivation. Because sales reps are only allowed to discount a deal so far, your message must motivate them to bring it up the chain of command and obtain approval for additional concessions.

  • Choice. Gaining concessions from a sales team requires a decision to be made by the sales executives. Your message must present a clear path (such as a budget restriction) to guide the vendor to your preferred outcome.

  • Leverage summary. A strong message must convey one or more sources of leverage, such as deal uncertainty or credible Plan B options. You must show the vendor they need to compete for your deal.

  • Speed up or slow down the deal. You must change the sales rep’s perception of their forecast, and the timing of your deal can pressure the rep to make concessions.

The most impactful messages are those tied to an actual business case that can justify why you need concessions on pricing or terms. Without this, the vendor will offer the following excuses:

  • “Revenue recognition issues prevent us from providing a lower price”

  • “Better pricing is reserved for higher volume commitments”

  • “Contract terms are standard and non-negotiable”

Viable business case messages focus on budgetary constraints, change in leadership or business plans, lack of adoption or usage of existing licenses, or the ability to grow the platform. Remember, with any of these messages, it is crucial to remain consistent across all points of contact in the organization, and through all rounds of negotiation. For more information about dealing with SaaS vendors, download any of the following deal guides: