Getting the Best Price

Part of negotiating a good contract is, of course, getting a good price. Price negotiations are presented here in a separate section because they are very important.

Discounts are Meaningless

"Save 50%." Is that a good deal? Yes, if the pre-discount price is reasonable and customary. No, if the pre-discount price is unknown or irrelevant. Since you typically don't have access to the vendor's price list (and if you think you do, it's time to remember the miracles of desktop publishing—anyone can create a price list these days), discount levels are meaningless. Forget the discounts: focus on the net price.

Use Good Old Competition

If you are negotiating prices, you've fallen in love with a particular tool, right? I have yet to experience a CRM purchase where there is not a clear differentiator between candidate #1 and candidate #2. In other words, CRM decisions are rarely based purely on financial considerations. Even if candidate #2 is a big step down from candidate #1, make sure you keep it alive enough to give you a firm quote. Share the interesting tidbits of that quote with your preferred vendor to activate some competition. For instance, if candidate #2 is throwing in the customer portal for free, inspire candidate #1 to do the same.

Understand the Sales Rep's Compensation

Sales reps are always compensated on license sales, often on sales of implementation services (but sometimes at a lower rate) and sometimes on the first-year support fees (often at a lower rate). They always have a license sales quota, but that's not always true for services. Most will be flexible in proportion to their compensation.

Play the Clock

CRM vendors, like other enterprise software vendors, are known to be much more flexible around the end of their fiscal quarters, and even more at the end of their fiscal year. While you may not be able to schedule your purchases so precisely, it doesn't hurt to try. This is even more true for large purchases. If you are planning a large purchase, you really should schedule it for the end of a quarter. It could mean an additional 10% discount, or more.

Negotiate Now, Buy Later

Does it make sense to purchase licenses before you need them? It might. It's a matter of balancing two opposite facts: larger purchases get bigger discounts, but maintenance is usually charged for all licenses from day one (we'll revisit the latter below). If you anticipate needing licenses for additional products or additional users within a year to eighteen months, it's probably cheaper to purchase them right away to get a better price. But if future purchases are uncertain or may occur in more than eighteen months, it's usually better to make them when needed rather than incurring the maintenance fees. You can go for the best of both worlds by negotiating the price of add-on purchases within the contract. It's best to agree on a specific price for add-on purchases, for instance to stay with an established per-user price for a given timeframe. For distant purchases, or purchases of future products that are not yet priced, the best you can do is to get some level of discount. Since price lists are not published you'll have to trust the vendor to apply the discount, but it's better than nothing.

Site Licenses

For large purchases, or purchases that will grow large over time, you may want to negotiate a site license that gives you the right to use all the vendor's products for any number of users. There's typically no price list for site licenses so plan for a long (but usually fruitful) negotiation. Make sure you understand what products are covered under the agreement. The vendor is unlikely to give away all future products but should be able to offer reasonable guarantees if products are renamed or discontinued.

Focus on Maintenance and Support

In the long run, support and maintenance fees can be higher than the cost of the licenses themselves. Just do the math: if the support fee is 20% of the license fee, in five years you will have paid more in support than in licenses. (If you must consider the time value of money, please whip out your spreadsheet and add some reasonable inflation number to the support fees—you will find that your sophisticated computations yield a result that is awfully close to five years). Therefore, it pays to be very clear about support pricing. Ask the following questions:

  • What is the basis for computing support fees? Support fees are typically computed as a percentage of the list license fee so you want to make sure you understand the exact computations for the first year as well as for future years.

    If you are getting a discount on the license fee, does it extend to the support fee? This is not automatic, so check. Some vendors have a policy of no discounts, or limited discounts only on support.

    Let's run through an example. Say that you are buying $200k of license (list price) with a 30% discount for a net price of $140k. The list price for support at 20% of the list license price would be $40k. If you can get the same discount on the support fee as you got on the license that would make it only $28k. Notice that a 30% discount on a $40k purchase is rather generous, much more generous than the same 30% discount on a $200k purchase, isn't it? The numbers are summarized in Table 7.1.

    Table 7.1. Example of Pricing of License and Support Fees

    License List Price

    License Discount

    License Net Price

    Support List Price (20% of list license)

    Support Net Price (20% of net license)

    Support Net Price (15% of net license







    While you have a pretty good chance of getting the vendor to compute the support fee off the net license price, getting an even lower support price is going to be very difficult, although you may want to try it. For instance, you could request a 15% percentage of the net license fee rather than 20%, giving you 15% of $140k or $21k. This is the last column in Table 7.1.

    That was fun, but it only works for the first-year support fees, and what really matters for support fees is the long run. So the next step is to define how the fees will be computed in subsequent years. A reasonable request is to apply the initial discount forever. So if you got 30% off the first year, as in the example above, you get the same 30% the following year. But 30% of what? If you make no additional purchase, then it should be pretty simple, yes? Not necessarily. Vendors make pricing changes from time to time and contracts typically read, "Support fees are computed from the then-current price list", so your support fees can change even if nothing changes in your configuration. Also, you may make follow-on purchases, so make sure that the contract defines how they are treated for the purposes of computing the support fees.

    Finally, pay attention to support levels. Say that you picked "Silver" today (vendors love the so-called metal packages) and you negotiated a permanent 30% discount on it. What if you later decide to upgrade to "Gold"? Do you get the same 30% discount on Gold or does the discount go away? And what if the vendor decides to retire the old support packages, which is not uncommon? Ideally, your discount level should apply to all future support fees. You may need to settle for something more modest, however.

  • Can there be a cap on support fee increases? You just have to ask (really!). Vendors readily agree to limit fees to the consumer price index, but you can ask for anything else that seems attractive to you. You should not get much pushback from the vendor on this as long as you are using a reasonable index. Make sure that caps apply yearly. In other words, if the vendor doesn't increase prices in a particular year, you can't get a double increase the year after.

    You should be able to get a special deal if you prepay for several years of support, but you don't necessarily want to prepay that much ahead of time. You might be able to get a (smaller) discount if you commit to buying several years of support even if you don't pay for them upfront. The small savings associated with that strategy are not usually worth the trouble, to be honest.

  • When does the support contract start? Standard contracts usually have support start on the effective date of the contract, which could be months before your implementation date. (To be fair, you will be using support services during the implementation, unless the vendor is handling it for you, so this is not completely irrational).

    A relatively easy concession to get is to delay the start of the support contract to a reasonable date, roughly corresponding to a speedy implementation. (The vendor is unlikely to agree to start the support contract on your actual implementation date because that date is subject to change and is outside the control of the vendor, even if the vendor is involved in the implementation.) If you delay the start of the support contract by 3 months you just got yourself a 25% discount on the first-year support fee. Congratulations!

    If you are buying licenses in advance of your needs, as discussed above, you may be able to negotiate a delayed start of the support fees for a reasonable portion of the licenses. Again, the vendor will probably insist on a firm schedule for the start date rather than a schedule tied to your actual deployment. For example, if you are planning to deploy half the licenses this year and half next year, you could argue to pay only half of the support fee for this year.

Pay Late

No, I'm not suggesting you be late on your payments, but rather that you negotiate extended payment terms. For large purchases, you should be successful, although you should expect to pay at fixed dates rather than dates linked to your successful implementation or deployment of the tool, as discussed above.

Odds and Ends

The big-ticket items are described above, but there are some areas where you can get some leverage, usually without much of a fight: training credits, membership to the user group, and executive sponsors. Vendors, especially the smaller ones, often throw in some free training to sweeten the deal. Make sure that you can actually use the training. For instance if the free training is for vendor-site classes and requires extensive travel you may find that a fee-based class at your site is actually cheaper (and, unfortunately for you, the training credits won't transfer over to training at your site). Also check the waiting lists. Often free training is available only on a space-available basis, which may translates to not in this lifetime. Finally, check on expiration dates. Complimentary user group memberships may be negotiable if the user group is controlled by the vendor. Check to see whether this includes registration to the meetings. You will most likely have to pay for travel expenses. And then there are the executive sponsors. An executive sponsor is an executive who is assigned to maintain a good relationship with your organization. Beyond that no one really knows what an executive sponsor does (but it sounds good, doesn't it?). Ask for details. It's never a bad thing to have a good rolodex including someone you can call if you run into trouble. Take the executive sponsorship but don't expect much from it, and certainly don't give up on other important negotiation points because you have an executive sponsor. If you have a choice, I recommend selecting someone as high as possible in the hierarchy for the maximum amount of leverage. I would also pick someone based at headquarters since that's where the action is with escalated issues.

Are Used-Car Buying Techniques Worthwhile?

Some people think that hardball negotiation is best. Ask for the world, they say, be ruthless, and you'll get the best deal. While such tactics work well when buying used cars, I'd stay away from them when buying a CRM system, especially for a large purchase. For starters, an overly tough negotiation strategy may prod the vendor into a similar behavior, perhaps fostering unreasonably stringent terms in areas of the contract that you are not focusing on. More importantly, by squeezing out the last drop you may alienate the vendor when in fact you need a build a strong partnership for a long time. Don't destroy the goodwill that will get you responsive, cheerful help during the implementation and for the life of the support contract, in ways that cannot be regulated in a contract. And finally, vendors who are willing to give in to harsh demands may be desperate. If the vendor says yes to everything, will it stay in business for the long term?