COVID-19 presents a significant financial challenge for startups. Reducing vendor spend is a surefire way to take action.
In this post, we'll go through some tried and tested methods for negotiating with your vendors, as well as templates that YC startups have effectively used to get drastic discounts.
Negotiating for discounts with your vendors poses little risk with outsized returns.
SaaS and other recurring services feature pricing pages that make it seem like pricing is fixed and that everyone is paying the same amount. This is far from the truth, as discounts are standard in attracting and retaining users. In fact, negotiating your subscription contract is the industry standard.
Vendors are highly motivated to reduce their churn rate, or the amount of users that choose not to continue paying for the service.
Through industry specific forums and aggregators like Capiche it's quickly apparent that the founders that understand this pay much less than founders that don't.
Although negotiating with all your vendors will be initially time consuming, ensuring that your company is achieving the best return on cash makes you more competitive in the long run and gives you more runway predictability.
How do I get started?
Start by aggregating a list of all of your vendors in a spreadsheet. This sheet should include when payments are scheduled to be made, the team member responsible for that vendor, historical and projected spend, as well as a link to the relevant pricing page or contract.
Having information about how much the product is currently being used is also helpful. Check the billing portal or sent invoices to get a better grasp on this. As usage varies by the type of product, spend some time understanding what metric you're being billed against before reaching out.
If you have information on discounts or quotes granted to similar sized companies, be sure to include that in a notes column on that spreadsheet. In addition to Capiche, you can find discount benchmarks through Product Hunt Founder's Club, F6S, and YC Startup School.
What should I send to my vendors?
With this data collected, you're now ready to reach out to your vendors.
Most vendors will not have an assigned account manager, making it simple to reach out with a templated message. Here's an example email script courtesy of Jeremy Yamaguchi, CEO of Lawn Love, who was able to get discounts from more than half of his vendors with this message:
Subject: Help with price reduction
Hi <first name of contact>,
I wanted to reach out, as due to the COVID-19 situation we're in need of some pricing relief.
<Company Name> is a <description of company> in the <company industry>, and we've been a <vendor> customer for some time now. Due to the wide-spread stay-at-home lockdown orders we're seeing significant disruption to our business.
<Vendor> represents a significant expense for us, and we need to find a way to reduce pricing or add credits to help defray this cost. We've loved your service and would love to remain a client and continue to grow with you for the next 5+ years, but we need to stay in business in order for that to happen.
Can you please let me know what your steepest possible price reduction would look like, or if you'd be able to offer another solution to help significantly reduce the cost of your service?
Wishing you the best, and hope you and your family are staying healthy out there.
This message can be sent directly to the vendor via either email or website embedded chatbots. Most vendors list their billing contacts on the contact page or the footer of their website, but if it's not listed you can always try contact, support, or billing @ the vendor's domain. You can also add additional details from the spreadsheet that you put together if you think that they improve your case.
Andrew Jiang, CEO of Soda Labs, recommends that for most vendors you should keep your message simple, go for a big ask, and to include a small emotional appeal. For vendors that provide professional services or represent sizable spend, additional work and a personal touch might be required.
These discussions usually move quickly off of email and onto a scheduled call, where you can share more details about your situation and a personalized resolution.
What if they decline?
You can expect a significant portion of vendors to politely decline. The best way to move forward is to refer to your spreadsheet and ask how important that vendor is to your business.
Subscription costs have a tendency to creep up, especially if you don't have a dedicated head of finance, making this the perfect time to consider if the vendor is a necessity or a nice to have.
This should give you a good understanding of your BATNA, or best alternative to a negotiated agreement. Getting a quote from a competitor could be a great approach to getting a better offer. For instance, if Intercom sends you a quote for $5000/month for 10000 contacts, companies like Drift are usually willing to match if not beat that offer. You can find alternatives to the vendors that you currently use on websites like Capterra and G2.
If the vendor is adamant on maintaining their original price point, now would be best time to considering canceling the subscription or switching to a vendor that is more flexible with pricing.
You should view every subscription as a signed contract that requires consistent review.
Keeping your renewal calendar with associated terms, payments, and usage up to date is an important part of maintaining good financial operations.
Trimwire was built to help you automate this process.
By organizing all subscription spending and savings insights on one platform, Trimwire enables you to easily scale your vendors and tools without having to worry about wasting valuable time on reconciliations and overspending.
It's important to remember that negotiating is about coming to a mutual understanding, especially in light of the current economic situation. Maintaining empathy with your vendors through this process goes a long way in ensuring that your company has the best tools to succeed.