April 13, 2022

Software pricing and terms: key areas to evaluate when investing in SaaS

Buyers have more leverage than they realize when they buy SaaS software. Here are 7 key negotiation points for better pricing and terms in your next contract.
Capchase x Vendr

This post was produced and written by the Vendr team in collaboration with Capchase.

Barring a few notable exceptions, the pricing and contract terms for most SaaS software tools are highly variable. The price you pay can fluctuate based on your logo, expected license or usage volume, length of the contract, time of year, etc. It may even depend on the sales rep you work with. 

When startups don’t have logo recognition or high volume on their side, pricing can seem as though “what you see is what you get.” Over the course of the $1B+ in contract negotiations executed by our team at Vendr, we’ve learned that while the levers aren’t always apparent, they’re always present. You only need to know where to look.

7 areas of opportunity in software negotiation

Every contract and supplier is different, but in general, you’ll encounter the following common elements when evaluating and negotiating for SaaS software. They represent the largest sources of pricing variability, and your best opportunities for negotiation when considering purchasing software. These include:

Unbundled pricing and SKU-level pricing

When evaluating pricing, pay attention to the construction of the software offering and price. Often, sellers may bundle popular or complementary tools together. While this method is beneficial for the seller (and it’s sometimes desirable for the buyer to get them this way), it opens the door to paying for tools or features you don’t need. Many times, you can negotiate to have these features unbundled. This allows you to get the software you need without paying for features you don't.

Cost implications as you grow

Businesses experience customary growing pains, but SaaS pricing shouldn’t be one of them. When evaluating a contract, be sure to examine how growth will affect pricing. Be on the lookout for situations where it gets costlier as you go along. Increased volume or usage should always offer a cost-benefit for the buyer. If not, work with your sales rep to establish better volume pricing terms. You may be able to negotiate this upfront with projected increases or approach it as a long-term strategy that evolves over subsequent contracts. 

The right software tools can enable growth at scale, but at a considerable annual investment. Being mindful of cost and runway in the early days can ensure stability long-term. Pacing out your SaaS spend with upfront purchase and installment payment options is one way to balance growth while maintaining capital efficiency.

 

Variable or introductory pricing

Often when establishing a relationship with a new supplier, the sales rep may have access to initial pricing far below their standard pricing model. While these variable or introductory pricing offers seem enticing, it's more advantageous to secure fair long-term pricing rather than “get a deal” in year one. When negotiating with a new supplier, be sure the price you agree on accurately reflects the expected investment for the long term. 

Service-level agreement (SLA) guarantees

Good contracts consider not only the best-case scenario of vendor relationship management but also what happens when issues arise. When contracting with a new supplier, take time to fully understand each party's responsibilities and performance expectations over the contract term. Strong SLAs prevent mid-contract disputes. They can also help companies avoid costly issues related to downtime, disaster recovery, and contract termination. 

Licensing models: annual contract vs. drawdown

Not all license agreements are created equal. Depending on the product or service model, you could either pay a flat fee per seat or sign a usage-based agreement. While both have their place, take time to understand how these will impact your budget long term.

When signing a credits-based, drawdown, or usage-based agreement, pay close attention to the consequences of early drawdown or overages. Often, actual usage in year one will overshoot the estimates established at the beginning of the SaaS buying process. Be clear about what happens in the event of early renewal or usage changes mid-contract. Being a more valuable client for your supplier shouldn’t negatively impact your budget.

One-year vs. multi-year agreements

There is a perennial debate about the wisdom of multi-year agreements. While multi-year agreements on the right tools are a way to save money, use caution when signing multi-year agreements — especially with new suppliers. Often, the early years of business growth bring constant change to your tech stack. The cost-savings you intend with a multi-year contract may be lost if your needs change before the end of term. 

Renewal timelines

One of the more costly pitfalls of SaaS contracts is the dreaded missed cancellation window. Auto-renewal is becoming the rule over the exception when you buy SaaS software, so it’s important to pay special attention to the renewal clause in your contract. If the auto-renewal clause can’t be negotiated, good vendor management practices will become your best ally in controlling unwanted spending.

Good stack management is the cornerstone of spend optimization, and it begins well before the cancellation date in your contract. Setting up a deal for evaluation 90 to 120 days before the end-of-term gives you a chance to evaluate the tool on its own merits, and make adjustments where needed. It also puts you in the best position to negotiate contract improvements based on your most recent data. 

Staying ahead of software pricing and terms

As the options for software solutions grow, the industry will continue its trend toward customer-centric, transparent pricing and negotiation. And by entering negotiations fully informed, buyers can walk away from the table with the best software solution, a fair price, and a better supplier relationship that pays dividends down the road. 

About Vendr

Vendr is changing how companies discover, buy, and manage SaaS. Vendr's SaaS buying and management platform offers both a product and people-powered service to enable the world's fastest-growing companies to purchase software quickly and with guaranteed savings.