In the last year, we inspected more than 250 Salesforce deals, which included renewals and new purchases. Of the renewals, 99% increased the customer’s total spend. Perhaps more interestingly, the deals showed an 11X unit price variation for the same products in similarly sized deals, and featured price premiums of 2X over Microsoft’s competitive offering – the Dynamics 365 CRM product.
What enables Salesforce to charge so many different and such high prices for its product sets? It’s the supplier’s well-oiled sales strategy, which is designed to land customers with its core CRM solutions and expand its footprint from there. The vendor’s Sales and Service Cloud core offering is an industry leader, and the sales reps use its dominant position to answer every customer demand for digital transformation solutions. At Salesforce, this means rebranding old products, pushing new solutions, and offering enterprise deal structures that encompass more than just customer workflows. The graphic below summarizes how this strategy plays out.
Once its CRM is installed, Salesforce knows that its product is (a) highly popular among users and (b) very difficult and time-consuming to replace. This “stickiness” makes sure that the sales reps revenue stream is ever-increasing – and a sure thing.
Before any negotiations occur, the sales team works diligently to mine the organization for information, cultivate relationships, and plant the seeds for new opportunities among stakeholders. They target individual business units and sell directly to them – knowing that these buyers are probably not trained in negotiating like their peers in sourcing. They are trained to methodically chip away at any alignment you may have achieved, undermine your ability to control deal information, and test your messaging across the organization, right up to the C-level.
More challenges from Salesforce can be found in its contracts:
The standard Salesforce contract now lacks renewal protections, leaving customers vulnerable to larger than average price increases
When renewal language is included, the terms require customers to renew 100% of their products to maintain their discount levels, even if the products are not needed; this prevents customers from decreasing their annual run rate and forces new spend
Swap and transfer rights only apply to SKUs already in the contract and limit the types and amount of product eligible (not much flexibility)
Salesforce offers lower-cost custom SKUs to mitigate cost for limited functionality (restricted use licenses), however, the audit language pertaining to these licenses creates significant noncompliance risk to customers
We recently inspected a deal for a client with an annual Salesforce spend level of $11.8M. The client reviewed its usage and discovered that they only used about $9.6M worth of their licenses, and they wanted to right-size their spend. Because Salesforce does not allow customers to move forward and spend less, the customer added other needed products to keep the spending up at the same level.
Salesforce, however, answered the customers’ “corrected product set” request with a new proposal totaling $16.3M.
The client immediately went to work to build alignment within the organization, achieved executive-level sponsorship, and developed a compelling, consistent, and controlled set of messages surrounding the deal. After two months of negotiations, the supplier proposal was reduced to $13.5M.
The case discussed above, like most of our deals, underscores how critical it is to accurately map out your product demand prior to any engagement with representatives from Salesforce. If you leave it to them, then they may very well include deep unit price discounts, but the spend model will also feature grossly inflated volumes and assume all products in the deal go live on day one, frontloading net new spend into the first (sales commissionable) year of the contract.
The following illustration summarizes the best practices that we recommend clients use in dealing with Salesforce.
Clients who take the time and follow these steps can establish a low starting point for their Salesforce negotiations and mitigate the risk of buying more shelf ware. The deployment schedule plays a critical role in this example, as shown below.
Salesforce insisted that all the product would be deployed in year one; the customer, however, was not going to fully deploy until year three, and created a ramp model to reflect that reality. In so doing, they were able to generate leverage and take more than $2M out of the deal.
Understanding sales motivations
Often, the most successful negotiation strategy is one that provides a win-win; the customer gets what they want, and the sales rep gets some of what they want, too. This can be achieved by laying out different deal scenarios, outlining some that align with the sales reps’ compensation incentives, and others that do not. This tactic will prompt the sales rep to make concessions to achieve the scenario that most benefits them. In situations where clients move the bulk of a spend to year three of a deal, Salesforce will likely propose an “average annual” deal structure, which will level the spend out across a three-year period, increasing the spend in that first year, and as a trade-off, significantly reducing the customer’s cost over time.
In addition to getting the most net new spend in year one of a deal, we know that the Salesforce rep is also highly motivated to (1) sell you an enterprise agreement, which allows them to manipulate fund allocation to maximize their commission, and (2) push whatever products into the deal that Salesforce wants to aggressively market (often, newly acquired product families and industry-specific offerings that compete against their key competitors).
To help deal makers successfully navigate the challenges present in Salesforce engagement, we have developed a series of vendor-specific services, outlined below.
Clients frequently ask, “We’ve already started the process with Salesforce – can you still help us?” and the answer is yes. We can get involved at any point, but our leverage-based strategy works best when we get started early. We work with clients on everything from demand forecasting and modeling different deal options, to helping create stakeholder alignment, to messaging, to final execution and deal summary, showing how far you came on pricing and renewal terms.
To learn more about optimizing your Salesforce engagements, download our recent supplier briefing webinar on the subject here, visit our website to review our other Salesforce-related content, or contact one of our Salesforce experts.
- Rachel Annello is a Senior Consultant, Dan Beyh is a Senior Analyst, and Matt Gowing is a Lead Analyst at Accenture.