Many companies rely on 3rd-party software tools to manage messaging to their customers. One of our health-tech clients requires SMS exchanges to deliver on their core value proposition, selecting the right tool based on cost and scalability was imperative early on in the company’s lifecycle.
At the time of the initial contract, SMS consumption was relatively low, so the price per message at that volume made perfect sense to both sides. However, as messages to customers increased exponentially, the cost associated was too expensive.
This is an example of a deal that is not “future-proofed,” or protected from future financial risk. This impedes a company’s ability to control spend over time.
A dramatic shift in user behavior and usage
When the COVID-19 pandemic swept the country, demand for digitally-enabled healthcare services skyrocketed. Bolstered by this trend, consumption of our client’s products nearly 10X’ed overnight. Accordingly, the costs for the client’s SMS provider also 10X’ed linearly. In a matter of months, the contract grew from ~$40K per year to ~$400K, representing nearly ⅓ of the client’s total software spend.
The initial contract made sense to both the client and the vendor at the time of signature, but their radical change in data usage made their contract too expensive to support. At this level of spend, the cost of the software was threatening to impede upcoming headcount plans. Unlike commodities where you can easily price shop and have the upper hand in negotiating, the client’s product was totally reliant on this software tool, making it incredibly costly to replace.
Future-proofing
This is an agreement that would have benefited from one of the mainstays of successful supplier negotiation, future-proofing. Anytime you’re considering a long-term contract with a provider that bases their business model on how much of their product you’re consuming, make sure you implement a “ceiling” or at the very least “tiering.” Incorporating high-level spend control language protects your business from SaaS run amok.
How to future-proof your contracts
Your leverage is at its highest by far the first time you consider a purchase with a new vendor, so take this opportunity to introduce “not to exceed” language that protects your contract from ballooning. Failing that, ensure that your unit cost decreases if certain levels of consumption are met.
Here are some standard future proofing methods:
- Not to Exceed Language – introduce the concept of a price ceiling, i.e. “we will pay $.002 per SMS, not to exceed a total annual cost of $100K.”
- Rate Tiering – introduce better unit costs as consumption climbs past certain milestones, i.e. “we will pay $0.002 per SMS for the first $25K, $0.0015 for the next $25K, and $.001 per SMS for the final $50K” (all numbers are totally illustrative)
In this particular case, Tropic was able to intervene and leverage the continued growth to renegotiate this agreement, introducing rate tiers. Now, the client is consuming the product comfortably, knowing that their pricing is protected at higher levels of consumption. Unit costs now become progressively better as consumption increases, and the finance org has exerted real control over their largest software spend.
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