SAAS DEAL SIZING OVERVIEW
Total cost is dependent on two variables: price and quantity. Too often customers believe price alone is what prevents them from reducing their SaaS costs. The reality is that product quantity is equally important in the total cost equation and SaaS sales reps are skilled at manipulating volume to drive additional costs in negotiations. To justify any SaaS deal, we need to ask ourselves “do we need the licenses we’re purchasing?”
This SaaS Rightsizing report focuses on key demand forecasting techniques to mitigate purchase risk and highlights key topics related to purchasing licensing effectively to reduce SaaS cost:
1. SaaS License Under-Purchase Risk
Fear of over-purchasing causes many customers to not commit to long-term licensing needs, and only purchase SaaS licenses when needed. This leads to multiple small purchases at sub-optimal pricing. Without forecasting for license growth, you are eliminating a main negotiating lever. This section details the risk of under-purchasing with SaaS vendors and how this can have an impact on long-term costs.
2. SaaS License Over-Purchase Risk
SaaS sales reps are experts at inflating demand forecasts, leading to customers buying more than they need. This section details the impact over-purchasing has in a recurring SaaS pricing model. We detail how to identify and plan for situations where over-purchasing is a potential risk and mitigate long-term shelf-ware SaaS costs.
3. SaaS Purchase Demand Forecast Checklist
To help clients mitigate over- and under-purchasing, ClearEdge developed a checklist for building more accurate demand models when engaging in a SaaS purchase. Building your own demand model prevents SaaS vendors from doing it for you, which often leads to inflated proposals and costs. Understanding how much product you need and when you need it is central to your ability to obtain the best SaaS deal for your enterprise.
4. SaaS Deal Structures
Understanding the differences between SaaS deal structures is essential in figuring out which one is appropriate for your business. We examine each of the following common SaaS deal structures:
Standard Transactional SaaS Deal Structure: The standard SaaS deal structure separates transactions between different business units. Each purchase will have a separate order form and separate SaaS terms governing them. This deal structure is common when organizations adopt product for the first time or in small increments, but poses the issue of disparate pricing across different business units within the same organization.
Tiered Price Schedule SaaS Deal Structure: Tiered price schedules are commonly used to provide transparency on add-on rates for additional SaaS licensing. Though this structure clearly indicates SaaS pricing for future purchases, discounting included in SaaS price tiers are typically sub-optimal. We dive into when it’s advantageous to use pricing tiers and where it makes sense to avoid them.
Enterprise License Agreement (ELA): Potentially the most popular deal structure, the Enterprise License Agreement, also know as an ELA, is a capped number of provisioned SaaS licenses are given to a customer with add-on rates for additional licensing. It is common for customers to achieve a lower bottom-line SaaS cost in this model, but its bundled elements make it difficult to validate a competitive price. Learn the specific risks hidden in an Enterprise License Agreement and ways to use this deal structure to your advantage in your next SaaS negotiation.
Unlimited License Agreement (ULA): The Unlimited License Agreement is a less common deal structure used by SaaS vendors, but is often pitched when a customer is unsure of their future licensing levels. Having the ability to flex up and down with no add-on costs or license restrictions sounds appealing, but the reality is that the Unlimited Agreement is packed with multiple risks and hidden costs that will present themselves during your next SaaS renewal. This section will highlight the reasons SaaS vendors pitch the Unlimited License Agreement and what risks you need to be aware of in this deal structure.
SaaS vendors beat customers in negotiations not only through price, but through inflation of demand profiles. Over-buying and under-buying cause long term cost risk, so creating an accurate demand forecast is essential for achieving a successful SaaS deal. For additional assistance on your SaaS purchase, review some of the other ClearEdge resources listed below to help plan your strategy and mitigate risk.