Technology Negotiation Strategy

Why you must include price protection for cloud software renewals

Agreement renewals are a vendor payday, says tech negotiation expert Phil Downe

Author: Phil Downe

TORONTO – In my last blog ("How to avoid costly price escalation in cloud software deals"), we explored some of the potential price traps in cloud subscription agreements, which are part of the land-and-expand sales tactic used by many professional services firms. Why should you, as a buyer, include price protection on future subscription renewals? 

It helps to know that every software sales team is focused on increasing its monthly recurring revenue (MRR) and its quarterly bonus cheques. They will most likely benefit from both — at your company’s expense — without solid price-protection provisions in your subscription agreements. 

A cloud vendor can easily justify a higher monthly price for every add-on batch of subscriptions because: one, you’re buying in far less quantity, and two, each additional batch will be for a shorter period of time. This kind of price trap is foreseeable and avoidable. Every little vendor tweak in subscription pricing, if not subdued through price-protection, supports a future price increase. 

Most cloud agreements are silent about add-on subscription pricing during the term. But let’s move the discussion five years down the road to the next big vendor-payday: the agreement renewal. 

What happens in year six? Recall (from part one) that $15 wasn’t the real monthly subscription net price. That was the average price for 3,000 subscriptions over 60 months. The real net price was $18.75 per employee per month, adjusted for the 12 months of shelfware. 

What if the vendor comes back with 90-days-notice prior to the renewal date and wants a 60 per cent price increase to $24 per employee per month? How can they possibly justify that you ask? Did you ever even get a list price? A volume-discount guarantee? Is there any benchmark pricing at all to help guide the next pricing discussions? Likely not, because most cloud vendors do not publish list prices and they are notoriously secretive about pricing metrics. 

Phil Downe
Software negotiation expert Phil Downe (right) speaks with Kevin O'Leary (left) of TV's Dragon's Den and Shark Tank.

Negotiating without leverage

You are not amused and your boss is furious about this big hit to the budget. No one is happy except the vendor. They have a captive-client with no alternatives but to renew for another five years or pay some exorbitant amount for a shorter term. Perhaps you were not around five years ago, so the problem is not your doing. But the solution will be. 

Your company doesn’t have the time, the budget or the inclination to swap-out the perfectly adequate application that everyone is finally competent with. So you sit down and negotiate with little to no leverage and no viable alternatives. Where’s the phone number for that famous ex-FBI hostage negotiator, Chris Voss? Maybe he can help out? 

He’d likely prefer to negotiate with a terrorist. Any vendor can easily justify that 60 per cent price increase, if not more. If there was a competition for the business, they’ll say they were forced into a race-to-the-bottom on price. Your original discount was so high they didn’t make any money. They have the normative leverage. You have none. 

They may also throw in the inflation increase. After all, five years have passed and, to avoid cumbersome calculations, let’s just use three per cent, as many vendors do: $18.75 + three per cent for year one, plus another three per cent, compounded for each year, and now we’re up to $21.74. 

Rotman Master of Finance
Rotman Master of Finance

Many vendors also work-in a small percentage increase for productivity-and-feature enhancements. Over five years they likely upgraded the application a dozen times. Let’s add an innocuous two per cent per year in the same fashion, and now your renewal price is easily justified at $23.93. That’s a 60 per cent increase and they haven’t broken a sweat. That’s the vendor’s easily justifiable price for another full five years, 3,000 employees x 60 months x $23.93 = $4.3M. 

Cloud vendors are experts at reassuring buyers that long-term price-protection is unnecessary and works against the best interests of the buyer. Their pricing must be fair, according to the standard rhetoric, or their customers will leave and go to another vendor. 

Don’t buy it. Insist on future subscription price-protection and full-tiered pricing transparency. If you cannot quantify and predict your costs through periods of growth and contractions for the entire useful life of the solution, then you are just setting your company up for the vendor’s land-and-expand tactic. 

Phil Downe is an independent IT negotiations specialist and principle with Relations Management Group Inc. based in Toronto. He can be reached at 416-804-7445 or by email. Read all of Phil’s blog posts on technology negotiation practices here.

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