The art of negotiating a contract

MY TAKE:

Effective contract renewal negotiations are critical to keeping costs low for your organization while also acknowledging the potential for rate hikes from vendors.

• Why it matters: Vendors often attempt to raise prices during renewals, sometimes significantly. I once had a vendor I work with present a mildly upgraded contract with a $37,500 increase - a 167% jump. (I got it down to 33% increase with favorable payment terms.) This underscores the need for effective negotiation strategies to manage costs and preserve valuable partnerships.

Negotiations can be scary and awkward if you’re new to vendor management. Folks in sales can be extremely pushy (to the salespeople reading this newsletter, I love you, but I speak the truth!) and it can be at times extremely difficult to tell someone “no” when they ask enough times.

People take semester-long classes on negotiations in MBA programs, so don’t expect something like this to feel comfortable right at the outset. It’s a lot to learn, but it’s one of the most valuable skills you can build at any position in the company. My CFO knows by now that I don’t need to include him on contract discussions until it’s time to sign—he knows I’ll push for the best deal we can get with favorable payment terms.

Here are six tactics you can apply to negotiate contracts with price increases:

1. Do your homework. Research market rates and competitor pricing. Ideally you start this before your contract is up for renewal. If possible, review the contract performance and evaluate its value delivered.
2. Understand the vendor's position. Ask for justification of the price increase. Don’t just accept their price for an answer. Identify their priorities and make sure the price hike actually makes sense.
3. Leverage your position. This will unfold in two ways: use your role in the company (if you aren’t the owner, you can argue that your hands are tied/your CFO will never accept this rate hike), and highlight the fact that they’re (probably) not the only business in this market and you can move to a competitor.
4. Propose alternatives where applicable. Suggest longer contract terms for price stability if your organization will allow it, and ask for any sort of bundled/loyalty pricing. See if there’s anything you could cut from the budget.
5. Be willing to walk away. Know where your maximum is, and be prepared for alternatives. This is why it’s beneficial to not lock yourself so deeply into any single vendor where it’s impossible to part ways with them.
6. Be firm with your language. This is one of the simplest ones that is often overseen, which is why I’m calling it out last. A simple “We’re not going to agree to these terms” or “We’re not going to pay that amount” can go a long way. The bottom line: Delegating is tough and feels unnatural, but committing time and energy to the practice will set you apart as a skilled leader. Bon courage!

SOMETHING EXTRA:

🤖 Tetris can help prevent intrusive thoughts associated with PTSD. Yes, Really!

• This is actually a study from 2020, but I just came across the topic on Threads and had to deep dive. (There was also a lot going on in 2020 so, you know, easy to miss the news.) 📚 Does negotiation scare you? Never Split the Difference is the book to read on negotiation. I can’t recommend it enough.

DIVE DEEPER:

Contract renewals often come with the challenge of price increases, and as we've seen in the example of a 167% increase, these can be significant.

While negotiation skills are often taught in MBA programs, you don't need a formal education to become proficient. As corny as it sounds, practice and experience are legitimately your best teachers. As you become more adept, you'll find yourself handling these discussions with increasing confidence, being able to handle the entire negotiation yourself before handing it off to someone else if you don’t have signatory authority.

• One of our vendors a year and a half ago proposed a contract renewal (upgrading from Enterprise Starter to Enterprise) with a staggering 167% increase, amounting to an additional $37,500 annually with no change except for 10 additional seats.
• By the time I was done, I got our contract down from $60,000 paid 100% up front to $30,000 paid over 4 quarters. It was a hard-fought battle, but overall I was pleased with the outcome.

Here's how I navigated this situation:

1. Initial response: I expressed surprise at the magnitude of the increase and asked for a detailed justification.
2. Research: I quickly researched market rates and competitor offerings to understand our position. (If you really want to find out who I’m talking about, I tweeted about asking for opinions on this particular software’s competitors.) I also compared their Enterprise plan with their Pro plan to prepare for negotiations.
3. Internal alignment: I discussed with our team to determine the maximum increase we could accommodate, along with the payment terms.
4. Counter-proposal: Armed with this information, I started with suggesting downgrading to the Pro plan (a significant drop in revenue for them). They came back pushing the Enterprise plan, dropping the price from $60,000 to $45,000.
5. Negotiation: I candidly took a while to respond. I knew they were reading the end of their fiscal year and they’d be eager to get the deal locked in, so I let it marinate for a minute. I eventually responded with this: “There's just no way we are going to be able to justify the jump from Enterprise Starter to Enterprise at our current stage and in the current macroeconomic environment, so we are looking at options outside of [Vendor] that will be more cost effective for our company.”
6. Final Pricing: They came back with a contingency on signing that week to renew at $30,000, another $15,000 price cut!
7. Resolution: Playing hardball just a bit more, I let them know I could only get approval for this 33% increase if they allowed us to pay in quarters vs. 100% up front. They agreed, we signed, and we got our extra Enterprise seats.

To wrap this up, I wanted to share some of my go-to scripts for pushing back on pricing.

• The shock factor: "I have to say, I'm quite surprised by this proposal. A X% increase is far beyond what we had anticipated or budgeted for. Can you walk me through the factors driving such a significant jump?"
• The downgrade scare: “While I’m sure the [higher tier] plan provides value to others, at this stage in our company’s growth/with how we use this product we are better suited for the [lower tier] plan unless you can bring the cost down substantially on the [higher tier] plan.”
• The no-go: "I appreciate the time you've taken to explain your position. However, I need to be clear: I simply can’t agree to these terms. Our maximum budget for this service is $X. If we can't find a way to work within that constraint, we'll unfortunately need to consider other options." Successful negotiation is about finding a balance. While you want to secure the best deal for your organization, maintaining positive vendor relationships can be valuable in the long run. Approach each negotiation as an opportunity to hone your skills and demonstrate your value to your organization.

As you gain experience, you'll develop your own style and strategies. Don't be discouraged if your first few negotiations feel awkward or don't go as planned. Each one is a learning opportunity that will contribute to your growth as a skilled negotiator and leader. You’re not going to feel good about every negotiation, and sometimes a vendor really won’t budge. At least you know you tried.