You’re negotiating your SaaS contracts all wrong

Hi Enterprise Software Buyers 👋🏼 Enterprise Software Seller here! And here’s a hot take for you — you’re negotiating with us all wrong.

And more specifically, you’re costing your company probably hundreds of thousands of dollars by not being nice to your sales rep and just making the simple decision to play ball when they ask you to describe what’s important to you.

Let me elaborate.

Most software buyers enter contract negotiations like they’re preparing for mortal combat because they think that’s what negotiating is about — winning and losing. But it doesn’t have to be so zero sum, and more importantly, there’s a better way to arrive at the ideal outcome for both parties. The future generation of negotiators has moved beyond this zero sum thinking and arrived at nonzero negotiating, to borrow a phrase from one of Reid Hoffman’s favorite books.

Negotiating does not have to be combative, even though we’ve been taught that in many cases, but it is subject to the prisoner’s dilemma. As Google so eloquently tells us:

“The typical prisoner’s dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.”

Sellers and buyers alike cave to human psychology in this way, frequently shutting down in a failed attempt to protect themselves while negotiating. Most commonly I see it happen on the buyer side first, likely because there is really no good guidance out there for buyers on how to navigate negotiating as a buyer.

What’s the alternative to the win/lose dynamic of the prisoner’s dilemma in software buying? What it means to truly cooperate in the context of an enterprise software deal and arrive at a better net positive outcome where both parties win can be explained by another analogy: blockchain.

What is blockchain, you ask? Another topic for another time (and a better-equipped author 😅). For the purposes of this analogy, I’ll again direct you no further than Google to illustrate that despite your personal proclivities, blockchain technology is disrupting the economy.

Exhibit A:

In layman’s terms, blockchain is a technology that allows for transactions that have an unprecedented degree of transparency.

Because blockchain transactions can be verified with absolute certainty, blockchain transactions also enable an unprecedented degree of decentralization in commerce. Blockchain technology solves for verification so the governing bodies that are typically required to provide the oversight of that verification are no longer needed, dramatically reducing the opportunity for human error in judgment.

Blockchain is a roadmap for what a win/win outcome in enterprise software negotiations looks like for those two key reasons:

1. The nature of the transaction is characterized by transparency.
2. The terms of the negotiation are decentralized.

In the context of a SaaS negotiation, this means that 1) both sides openly share their respective requirements and goals and 2) the terms of the deal are not governed by one person or even one party but rather defined by the nature of the value exchange at hand, otherwise known as business impact of the deal.

What is meant by business impact? For lack of a better explanation: the stuff that actually matters to people, which, as highlighted in my previous post, is creating value (or at least giving the perception of creating that value).

Stuff like:

• How are we going to differentiate ourselves against this key competitor XYZ.io in the next 3 months before we have to report ABC numbers to our investors?
• What are we going to do about all of this data that we just spent millions of dollars on last year that has turned into a total embarrassment because no one is actually using it?
• Who is going to take the blame for the fact that we have missed our SLA for the last 4 quarters now and we have no headcount available to hire an additional team member to address it?

The more specific you (the buyer) can be in sharing quantifiable (numbers) and qualitative (people) details, the better your outcome. Why? Because the more we (the seller) understand about your internal landscape, the more leverage we have internally to negotiate on your behalf. We aren’t asking you these questions to trick you, which is what most of you seem to think. We’re asking you these questions because these are the questions our boss is going to ask us. And if we don’t have answers to those questions not only do we look like we’re not doing our job but more importantly for you, we lose the credibility we need to negotiate favorable terms on your behalf.

Why is this information such valuable internal currency? Because this business impact is the currency that our exec, marketing, product and engineering teams need to do their jobs. You, dearest customer, are the money minter.

Most sales reps you talk to are more incentivized to close a large quantity of (qualified) net new logos in a short time frame than they are to squeeze $50k more out of your budget. If you can help your sales rep understand these three things:

• The earliest possible date for contract execution,
• The biggest blockers to pull that off, and
• Your company’s business case for using their product

I guarantee you’ll negotiate a better deal for yourself than you will if you approach the negotiation like you’re Tim McGraw in a duel scene from 1883.

Exhibit B:

Your sales rep needs to be able to articulate the business impact of the deal to convince their leadership that they are working on a real deal, and if they can do that they’ll have a much higher likelihood of getting approval on that discount you asked for because a 30% discount on our list price for one deal pales in comparison to the value we get from pushing the boundaries of our product positioning as a result of your ingenious use case. Furthermore, forcing yourself to go through this justification exercise if you haven’t already is only going to help you get that next promotion or take that next vacation or do whatever it is you want to do with increased credibility internally.

In summary: you’re negotiating your software contracts poorly because you haven’t been given the right mental model to approach them.

I want you to think: less Tim McGraw, more blockchain miner.

What’s a blockchain miner? I’m glad you asked.

Blockchain “mining” is a metaphor for the computational work that nodes in the network undertake in hopes of earning new tokens. In reality, miners are essentially getting paid for their work as auditors. They are doing the work of verifying the legitimacy of Bitcoin transactions.

Your role in negotiating your SaaS contract is to verify its legitimacy, which you do by defining the business value. You can use that to justify the purchase internally and your sales rep does the same for whatever asks you’ve made of them.

If you think about all software transactions as fundamentally just a matter of each party trying to find a way to coherently describe what it is that they are providing one another, (this product will save us $1M in SLA violations, this customer will crack a new use case for us that will generate $500k in incremental ARR over the next year), the trick is being as unique and specific and un-inimitable as possible in the description of that transaction. That’s how you ensure equitable exchange of value. The most efficient exchange of value can be achieved when you can ensure that each transaction is highly-specifically defined.

Are you solving a million dollar problem or a $50 million problem? And for who? How often? Where?

I think this goes without saying but this business impact approach isn’t something I came up with, for the record. I’m just articulating through flippant and hopefully engaging analogies what I’ve learned in my career. This is the process that top tier enterprise software companies have developed over decades and adhere to day in and day out. It’s just not publicly documented because it’s somewhat taboo to talk about. I think we’re all operating in the prisoner dilemma mindset because we aren’t quite fully sure if it’s safe out there yet. We haven’t been taught anything different.

The reason I wanted to share this here is because I encounter so many brilliant buyers who have the best of intentions with how they engage vendors but end up spinning their wheels (and ours) in the process because they think that negotiating is mortal combat and sales is an enemy out to milk them for all they’re worth.

What I love about sales today is that no longer needs to be the case. The most successful sales reps aren’t the best at pulling the rug out from beneath their customers, they are the best at identifying the most important problem they can solve for their customers and ensuring that gets communicated to everyone involved in the decision. Most of us don’t want to deceive or trick you into paying more than you should reasonably pay for our product, and frankly it makes our skin crawl when you engage with us like that. If we do our job well you’re getting much more value than you paid for, and if you do your job well you’re creating that value and personally reaping the reward. We, too, are hard-working, well-intentioned humans who are employed by a company with a product. We just want to do the best we can to further that goal and hopefully have a good time and meet lovely people while doing it.

At a higher level, the combative nature of so many contract negotiations I’ve witnessed is so absurd to me because at baseline, software (when it’s good) is extremely profitable:

Based on our conservative assumptions, the average BVP Cloud Index company generated a 68% internal rate of return (IRR) for every dollar poured into sales and marketing. (In comparison with the average S&P 500 company that strives to reach a 20% return on capital, it’s clear how much of an advantage cloud businesses have when it comes to efficiently recycling capital.)

Software margins are bananas. One time I asked the CEO of a large SaaS company how much it cost to provide his product (excluding S&M and R&D) and he tilted his head sideways and said “what do you mean?”.

Yes, of course there is supply and there is demand and there are signals as to what a product does and doesn’t bear in the market, particularly in this current climate, but at the end of the day, many companies that charge $1M for their product could charge 10% as much and still make money on the deal.

Point being, the contract by contract act of assigning a value to a SaaS subscription is much more of an art than it is a science. If my VP or CRO or CEO is reading this, close your ears. (That’s a joke - I wouldn’t have posted this if I didn’t intend to deliver information that creates a win/win outcome for both vendors and buyers ).

I say all of this not to give you leverage with which to tear down your poor sales rep in that next pricing call, because that won’t work. Even though the prices are technically made up, the power structures and people in place to ensure those prices are paid are very much not made up, which is why I am instead advising that you focus less on the price and more on the people - specifically, that poor schmuck you keep ghosting (aforementioned sales rep). The price will take care of itself.