Let’s get right to it: price is not pricing when it comes to many technology contracts. Pricing is the basis for determining the price you pay. Simple, not easy. After you and your team get past the “warmth” of the proposal evaluation, the contract comes. That’s often when things get considerably colder. Here are 3 tips for revealing the real price in complex technology contracts.
1. Always look past the “price at the pump”, especially with an incumbent vendor.
In a recent contract review of an imaging software agreement for a large healthcare system, the highly visible price appeared favorable for the buyer. It seemingly met the budget requirements and was the most competitive bid. It’s our job to put that kind of preliminary conclusion to the test. So we did. Unfortunately upon further discovery, the pricing language buried deep within exposed the visible price as an illusion. The real price required a bit of math gymnastics based on a matrix triggered by increased utilization. When the historical trend was used to project future utilization, the price increased to the tune of nearly $1 million. And that was just in year one of a three year deal. The software vendor in this case already knew their utilization because they were the incumbent provider. It’s hard to argue that this pricing strategy, in any way, benefited the buyer.
The lesson here is to look past the “price at the pump”, especially with an incumbent vendor. It’s true, we hurt the ones we love the most. Look, I get it. We’re all busy and want to trust that people will price things honorably. But you will discover a whole new kind of busy if you interpret price as pricing and have to explain a seven digit oops to your peers and/or the board. Take the time to fully review your pricing language and do the math based on your business demands…before you agree to the pricING.
2. Expose and eliminate two key price-impacting terms.
So, after working through the pricing language, all was well with our friends from the aforementioned healthcare system. Right?! Not yet. As we continued to pull back the covers on other parts of the language, we discovered two additional unfavorable terms impacting the pricing. First, is the “trigger”. Many vendors use annual dates within a multi-year agreement as triggers for escalating pricing. Such was the case here. These price-impacting terms don’t always jump off the page. So hunt for them carefully.
Another often overlooked ‘gotcha’ is whether the term is auto-renewal or evergreen, or a set term of years, and how this impacts pricing. Vendors often use auto-renewal to obliterate buyer leverage at renewal time. By the time the vendor provides the increased renewal pricing, the buyer is already committed to the new term (because they missed their window to cancel the auto-renewal…or there was no window in the first place). In other words, auto-renewal is often used as a price escalator and/or as leverage in negotiations. The kicker is that, if you oppose auto-renewal to the Vendor, then they’ll counter with a set term of years, which often isn’t any better, because, at renewal, the vendor knows you don’t want to replace a system you only bought 3 years ago. So your leverage is, once again, gone. The right approach is to choose whichever term makes the most sense based on your needs, but to, in each case, ensure your deal includes year-over-year price protection. This ensures that you’re not on the receiving end of a bait-and-switch, where good prices turn bad at renewal, and the vendor makes back all the savings they ‘gave’ you during negotiations. Remember, no one knows what will be happening in your business, or in the vendor’s industry in two and half years (when you start looking at the contract again). Make sure you have ongoing price protection, which, combined with an option to terminate (if you choose), gives you optimal flexibility and a hungry vendor. Hungry vendors are more aggressive with price and pricing.
3. Buying is emotional. Seek objectivity to protect your priorities.
We likely can agree that evaluating a contract is critical part of the buying process. Here’s where things get interesting. Buying is an emotional decision… especially in business. Buying is an action (a behavior) demonstrating trust; a willingness to part with money we own or control in exchange for a product, service, and/or person we don’t control. Trust is an emotional thing and a huge part of the community in which we spend the most time…work. Consider this: a recent market study performed and published by global consulting firm CEB concluded "71% of buyers who see a personal value in a B2B purchase will end up buying the product or service. Personal value had two times the influence on the buyer over the business value”. The fact is, most people aren’t as objective as they need to be in evaluating contract language for a purchase that will directly impact their work world. It’s healthy to get fresh eyes from someone whose only stake in your contract is to ensure your priorities are protected.
A few final words on our friends from the healthcare system. They saved more than $2 million on the imaging agreement. Additionally, they protected their priorities by avoiding a path leading to a mountain of stress and challenges that would have unnecessarily compromised their future focus and ability to serve patients (customers) with excellence.
Please comment, like or share with colleagues if you are so inclined. If you have a need for fresh eyes, give us a call or shoot over a note. Thanks for reading! More to come next month!