With 91% of technology leaders in a recent KPMG/Harvey Nash survey expected to make a moderate or significant SaaS investment in 2018 and 40% of this procurement happening outside IT department, business leaders need to move beyond simply policing licenses and signing purchase orders to maximize value derived from software.
One way to do this is to better understand the pricing strategy and fundamentals behind a vendor’s advertised price. By building perspective from “the other side of the table”, leaders will grow the confidence and discipline to make informed purchasing decisions. This understanding means competitive deals and favorable terms.
Pricing Strategy Components 101
SaaS prices are determined by policies that guide discounting and margin management. These are designed to either encourage or discourage certain behaviours and trends, depending on the goals of the vendor. PwC frames the common pricing components below. Beneath the surface of each one is a supporting set of values, goals or priorities that an insightful business leader should be able to capitalize on
- Packaging: Adjust pricing based on the product package (e.g., enterprise, small business, personal use; closely tied to product features and functionality).
- Term discounts: Preferred price offering based on extended contract term length.
- Loyalty discounts: Discounts provided based on customers historical spend.
- Volume discounts: Discounts provided based on quantity purchased at the point of transaction.
- Payment and credit adjustments: Price premiums to provide nonstandard billing options (e.g., quarterly vs. monthly) or extended credit terms (e.g., net 180 vs. net 45).
- Usage type adjustments: Variations to price based on license type (e.g., subscription vs. pay-per-use).
- Promotions: Pricing lever to promote a product for a limited time.
- Upgrades/Cross grades: Pricing lever to provide discounts for customer to upgrade to higher end products.
- Regional pricing: Regional variations to pricing as defined by regional hierarchy, for example, EMEA pricing vs. US pricing.
- Channel discounts: Discounts based on partner type (e.g., standard channel vs. specialised partner).
- Grandfathering: Allowing early, or existing customers to continue service at previous rates despite price increase for new customers.
Applying the Pricing Components in Negotiation
Consider the following scenarios where awareness of a vendor’s pricing rationale and business goals could result in more favorable contract terms by leveraging accelerators that sales people have built in their commission plans.
A SaaS startup with millions of dollars of fresh capital on their bank account will prefer revenue while a cash-strapped startup will give out substantial discounts for upfront payments and annual commitments. A quick check on CrunchBase of vendor's recent fundraising success can provide good understanding whether the SaaS vendor favour cash or revenue - a great lever to negotiate the best deal with the vendor.
Fear of Churn
There's nothing a SaaS vendor fears more than customer churn. The SaaS model typically requires heavy investment in customer acquisition while the cost of keeping an existing customer is relatively low. If a SaaS vendor has a low lock-in with your company and there are good alternatives, switching vendors frequently (or just entertaining such possibility) gets you either loyalty discounts or promotional pricing.
It's a good practice to periodically review lock-in power of your most important and most expensive SaaS vendors by analyzing switching costs. For example, data vendors (e.g. lead generation providers, sales intelligence services) are typically easy to replace thus giving their customers lots of bargaining power.
If you're lucky to work for a company with great brand recognition, leveraging your logo power is a sure way to get a hefty discount. Many SaaS vendors have special accelerators in place to motivate sales people to close high-profile logos as they seek to build their category leadership in the market.
If the customer is willing to offer a testimonial, periodic product feedback or participate in a case study that shows a product’s relevance, this may be another very valuable thing to the vendor. Sales people are always taught to protect the perception that their offering is valuable, so a willingness to provide some return-of-value goes a long way.
Every price discount strategy is built on something.
SaaS vendors might obsess over monthly or annual recurring revenue growth to establish a critical mass of customers. These companies might be prone to deep discounts for extended term contracts; often more so than their mid-discounting peers to build that coveted user base. As well, they may be particularly open to 'grandfathering' an existing customer in order to reduce churn despite the fact that price increases are in play for new customers.
By understanding the intrinsic value levers for each vendor, leaders can land attractive pricing and terms. Vendors rarely respond to discount asks because a competitor is higher, product fit is unclear or because a prospect wants to feel like they “won” and just wants some features thrown in. By contrast, discounting happens when customers understand a vendor’s internal priorities and finds ways to align their asks with areas of corporate or strategic importance. Build a case and then, just ask.
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