Getting the right pricing negotiated for an enterprise software purchase is one of the most fundamental requirements as pricing directly ties to the budget allocated to the project. There are a number of variables to consider when comparing pricing across software vendors.
First, I think it would be helpful for you as a software buyer, to think about how enterprise software vendors approach pricing strategy. Here’s an example list of topics organizations analyze when setting enterprise software pricing.
Now that you have a gauge of what goes into determining pricing behind the scenes, let’s examine what you’ll encounter as you evaluate different vendors and their unique pricing and discount structures.
Some common themes include:
Feature Limitations within Tiered Pricing
It’s common for software vendors, especially SaaS / cloud-based vendors, to offer tiered pricing such as “Bronze, Silver and Gold” editions.
Within these tiered pricing models, each tier has progressively more features. There is often that one awesome feature you “really need” that just happens to be in the next tier up. Experienced marketers often design these packages, and they know how to tempt you.
These tiers may also come with volume limitations. A good example of this is in the Customer Relationship Management (CRM), Marketing Automation or Email Marketing software categories.
Vendors will limit the number of users, amount of emails you can send or contacts you can have in your database depending on the pricing tier you select. To get additional volume, some vendors will ask you to go up tiers while others let you buy additional volume in bulk. Consider your near and longer term need to scale out volume as you evaluate these pricing alternatives.
Long Term Commitments
Many software vendors are only going to give you that “screaming deal” or deep discount if you commit to a long term deal, usually annual at a minimum. These companies want to be able to book predictable revenue to sustain their organization and improve forecasting. Only if you’re confident that you’ll get your money’s worth from an investment in a particular enterprise software, getting a discount by committing to an annual contract is a good bet. Often it is advisable to start out on a monthly or quarterly basis, even if more expensive, and eventually upgrade to an annual term once the value is clearly established.
I’ve recently even encountered vendors that don’t do anything less than an annual commitment – often citing that that is the length of time you will need to be assured of a positive experience and ROI from the investment. This logic usually makes sense – for them. Software companies want customers to commit to a longer term so they have a greater runway to provide value, generate good references and case studies, not to mention the assured revenue – all assets they need to grow their business in a predictable manner.
Alternatively, monthly contracts are often used as a differentiator for competing software companies, especially startups. You’ll find language like “no long-term contracts required” that mitigate the financial commitment and risk. Those are easier contracts to enter into though you may still be sold into a long-term contract over time.
Free Trial Offers
Another common practice, especially due to the proliferation cloud-based offerings, is the ability to get free trials ranging from a few days to a few weeks. Free trials can be hugely beneficial as you may be able to demonstrate trends for positive ROI during that time. You may also get hooked on the platform making it hard to give up if it’s not in your budget or some other reason you can’t acquire it at the time (it’s the classic “puppy dog close”).
End-of-Quarter or End-of-Fiscal-Year Considerations
This is a common scenario with larger vendor organizations especially those that are venture funded or publicly traded. Sales personnel in these organizations are usually under tremendous pressure to meet their quarterly or annual quotas and to bring in the right number of new customers and revenue. Also, their internal compensation models often provide additional incentive for going over quota.
As a result, they (and their sales managers), are more willing to accommodate higher-than-normal discounted pricing structures to enable them to meet or beat these quotas. Enterprise software buyers, that are not under urgent deadlines can use this situation to their advantage.
The timing of the software purchase may seem immaterial to the layperson, but it can often mean the difference between a yawn-inducing 5% discount versus a mammoth discount in excess of 50% or more, especially for larger technology purchases spanning 6 and 7 figures. The dirty little secret in the software industry is that their margins are much more variable than commodities and price elasticity is often modeled into the revenue projections that vendors make to their investors and Wall Street.
If you and your business end-users are able to wait until end-of-quarter to negotiate pricing contracts, you would be well advised to do so.
Number of Finalists in the Contract Negotiation Process
Expert procurement and contract negotiation specialists often recommend having at least 2 finalists for competitive positioning and higher leverage during pricing negotiations.
Regardless of whether you short-list your top vendor partners via a software trial, proof-of-concept, an RFI (request for information) or RFP (request for proposal), once your software selection process is complete, you would do well to objectively rank all the finalists and identify at least 2 or 3 viable vendor candidates that you can do business with.
That way, even if your #1 preferred vendor is not able to offer you the right pricing or other favorable terms that you seek or even if something doesn’t sit well with you (the way the vendor treats you during the negotiation process, how fast or slow they are to respond, the level of support they are able to provide during the trial period, etc.), you have a viable Plan B.
Interestingly, here’s a quote from Oracle CEO, Larry Ellison during the United States vs Oracle Corp trial “If it’s a genuine competitor, a company that can really do the job, a genuine competitor, our job is to figure out what we have to bid to win the deal – no magic here.” (Source: justice.gov.)
Buying through Resellers and Channel Partners
Sometimes buying a software product through a channel partner can lead to a better pricing outcome than buying directly from a vendor.
Depending on the circumstances and your profile (size of your organization, industry, where your headquarters is located, etc.), software vendors can be constrained in terms of whether they can work with you and the level of discounts they can offer (if at all).
On the other hand, you would be well served to look up resellers of that product that may have greater flexibility in terms of deal structure (e.g., they may offer value-adds such as free installation and configuration, 40 hours of professional services and training included, and so on) and the final pricing they can offer up.
The reason resellers can offer greater price discounts is due to the fact that they typically have a 20% to 40% margin from the vendor and they can get more creative with the deal especially if they are willing to sacrifice their own profit margin to win your business.
A perpetual license gives you access to use the software indefinitely. Normally, for the first year, this type of license also lets you download all updates to the software and to get technical support. When the year expires, you can remain with the last version downloaded or buy an new annual upgrade/support package, sometimes discounted for existing customers.
Different from the annual contracts (as those sometimes are paid monthly or quarterly), an annual license gives you access to use all the current and new features of a software for a year. Commonly, a software with this kind of licensing model has a free version that you can always use but with locked features. You can unlock the premium features with the purchase of a license.
Both perpetual and annual licensing, is generally used for on-premise software whereas SaaS / cloud-based deployment models generally follow a recurring subscription mode.
Also, for these license types, the reason vendors expire these is that they continue to make product enhancements and pass those improvements on to customers. Real-world economics and their operating constraints prevent them from giving lifetime updates/upgrades to customers for a one-time fee.
If you are purchasing software under this scenario, you’ll need to verify if you continue to get access to the product as it was when the license expired or if access is cut off until a new license is purchased.
Be mindful that there can be ancillary fees that are not rolled up in the price you pay on a regular basis. Perhaps you’re going to incur additional professional services and expert consulting, implementation fees, customization costs, or training expenses.
As a software gets more and more mission-critical, your team will likely need higher levels of support. Paying for it may be debatable as there generally high quality second-tier support vendors and service providers in many enterprise software categories that don’t have the same implementation fees and are able to provide incremental training and customizations.
All said and done, navigating software pricing can be treacherous and can mean the difference between procuring relevant feature / functionality within budget to a nightmarish situation that results in drained budgets, persistent user complaints and sometimes, job loss. Tread with caution!