In an homage to Jarret Pazahanick’s favorite phrase “Wild West Ecosystem,” we're getting roped in again. There has to be a way of knowing if a software vendor is going to put you into an awful lock-in scenario.
It’s a bad place to be in - it’s expensive, painful and professionally embarrassing.
And no – lock-in doesn’t automagically go away because you’re with a supposedly modern SaaS provider. Here’s the cheat sheet to make that lock-in assessment.
A great enterprise software vendor creates a customer experience that is so phenomenal that the customer decides to remain a customer years longer than they otherwise would have stayed. To create that great experience, a software vendor would:
- Find ways to increase functionality without increasing prices
- Use economies of scale to deliver ever-lower prices, aggregated benchmarks, etc.
- Make their pricing transparent (not opaque), easy to understand and available online
- Never split a module into two modules just to charge an additional subscription fee
- Provide subscriptions that allow for costs to go up AND down based on a customer’s changing user count or functional needs
- Focus on new methods, tools and partners that continuously improve and shorten implementation efforts
- Never pull an “indirect access” punk move and charge for the customer’s use of their own data.
But, when vendors decide to go the other way, they take the customer experience into a dark space. And to make matters worse, they devise methods to handcuff these customers to an ever more abusive and expensive business relationship. These vendors:
- Wallet-frack the customer’s bank account at every turn
- Lay traps in the renewal process so that a customer lacks time to acquire a different solution
- Rename, repackage, etc. their current offerings so that customers must subscribe to more and different modules just to maintain their current functionality
- Hide critical terms and conditions in frequently changing contract terms and conditions
- Price their renewals based on how locked-in the customer is, not based on the value they are delivering to the customer
Not all SaaS subscriptions are good deals. Like car deals, some will sucker you in with a low initial payment and then jack up your costs markedly at each renewal. Some make it impossible or economically unattractive to leave. Some use AI tools to determine how locked-in you are to their products and price accordingly.
13 ways SaaS vendors can lasso you into lock-in
So, what defines a bad customer experience in the SaaS world?
1. Vendors wait until the last second to negotiate a renewal with you– I hate this. The vendor’s sales/renewal team won’t really negotiate or even engage with you until they think there’s no time left for you to get another solution. In fact, the less time there is to negotiate a renewal, then the more outrageous and rigid their pricing becomes. These sales people will stall and stall any serious negotiation – you have to hold their feet to the fire and prepare to bolt. They need to know that you’re serious and will seek true love elsewhere if they don’t negotiate in a timely and equitable manner.
Personally, I’d start negotiating a renewal at least a full 18 months before the current term is due to expire. That way, you can line up a BATNA (i.e., best alternative to a negotiated agreement) or alternate software solution and still have time to implement it.
2. Vendors insist on price increases for every renewal period– These vendors aren’t focusing on using low/no cost open source software or using economies of scale to reduce prices over time. No, these vendors think nothing of wallet fracking your corporate bank account until it’s empty. If they can’t produce, now, a schedule of the added value you’ll get (and want) with each future renewal, tell them to go pound sand. Vendors should be using scale to, at a minimum, hold prices constant and not go up.
3. Vendors only offer price protection on renewals for a maximum of 2-3 years (and no more) – Vendors do this so they can really jack up the pricing after the initial term. They want the freedom to really gouge you after you’ve undertaken an expensive, disruptive and potentially challenging implementation. These vendors are hoping you won’t consider another option as the changeover costs are still a bit more painful than the new price tag for a renewal.
If you want to hear a massive gasp of incredulity, tell the vendor that you’ll only agree to these unspecified price increases if they agree to refund all monies you spent implementing their solution should they raise renewals more than GDP or CPI increases. It’s only fair they should share in the pain.
4. Vendors require you to use their database and/or their cloud computing environment – The more of their stack you’re obligated to use, the more you’re locked in. Can you run the applications on Amazon AWS or Google Cloud Platform, for example, or must you use the vendor’s proprietary environment? If you could find a cheaper cloud computing resource, are you free to do so? One ERP vendor requires its application customers to pay 2X more if they use someone else’s cloud platform. That sounds like lock-in to me.
5. Vendors insist on price increases in excess of inflation rate -Worse than #2, these vendors will tell you that they intend to provide ever greater functionality in future releases whether you need it or not. And, they expect you to pay for it. It’s like a car maker leasing you a basic economy car today but upping your lease payments next year as they’ve added 32 cupholders to the new model. You didn’t want/need them but they expect you to pay. If the product was good enough to buy now, warts and all, for one price, then the price should stay constant in the future.
6. Vendors can’t show you any scenario where your pricing goes down – Here’s another vendor favorite trick. They structure the math so that if you have more users, you pay more and if you need fewer subscribers it still costs the same. The Chief Revenue Officers of these firms feel they need to always show Wall Street that Annual Contract Values are always growing and that Bookings never go down. Unfortunately, your business might ebb and flow. SaaS contracts often only flow to the vendor’s advantage. In other words, the provider’s cloud technology might be elastic, but its commercial terms are not. This is a major negotiation point and one vendor’s hate to give ground on. Their greed shows they want an additional kind of lock-in. Because in keeping you tied to their products, they can lock-in the minimum revenue they will receive from your firm every year no matter what happens to your firm. It’s selfish and wrong. Fight this.
7. Data-as-a-Hostage – When a vendor holds your data hostage or threatens to exterminate it, this is another kind of lock-in/extortion ploy. This scenario happens when a vendor can unilaterally wipe out your data and application access over a late payment, late renewal, cutover to a competing solution, etc. It’s cold comfort that the vendor will let you get a dump of your data into a CSV (i.e., comma delimited file/spreadsheet) format. If your auditors, regulators, etc. can’t see historical data, in the context of the application software in use at the time, then they aren’t delivering value. What is so hard about letting a customer keep their data online for a year or two for limited use by 1-2 people?
On a related point, if the vendor keeps your data in a RDBMS, then why can’t you get an image copy of that database? That would certainly make data restoration more timely (as opposed to reprocessing every prior transaction).
A subscription is about more than a service. It’s about data. Regardless of what the vendor thinks, it’s your firm’s data – fight for it.
8. The subscription contains embedded URLs– Would you sign an agreement where the other party has the right to unilaterally change terms and conditions simply by changing copy on a webpage? No – that’s never a good idea. If it’s such a good idea, then why won’t vendors accept my client’s subscription contract where my client can change terms and conditions on a whim?
Yes, some vendors have to do this as they don’t own all the pieces to their solution. Third-party products that they embed into their solution are often sold via a link within the vendor’s paper. Except for this situation, no vendor should be including web links in a contract. If you can’t change the terms and conditions for the subscription, then neither should the vendor.
Vendors could change all manner of things prior to a renewal. They may require arbitration, insist on price increases, split and reprice modules, etc. Don’t give them this power.
The only thing worse than vendor lock-in is a contract that locks you into terms that the vendor can change.
9. Costly implementations induce longer usage terms and higher renewal pricing – If the switching costs to go with another software solution are high, then you are less inclined to move away from your vendor. As crazy as this sounds, some software vendors just don’t care how big, costly and painful the implementation is as they know it will make you a user for decades. If it was easy to switch, you just might do that.
That perverse logic also emboldens vendors to ratchet up renewal pricing as they know you are trapped by a high switching cost scenario. The lesson here is that high implementation costs trigger high switching and renewal costs. Look for vendors with a focus on fast, low-cost and effective implementations.
10. Don’t stagger different vendor solutions on different renewal dates – Let’s say you acquired additional SaaS products from the same vendor but each new product has a different start/renewal date. You just locked yourself in with this move. The vendor knows you’re now less likely to move off of their products as you’ve already prepaid the renewals of several of the other products. Get these products on the same schedule and then make sure the vendor knows you might well move to a competitor if they don’t play ball. Trust me, the vendor knows exactly how many products you’re subscribed to and the more that are under contract increases their boldness in asking for a big jump in renewal fees. Large numbers of subscribed products and staggered renewals are prime targets for big renewal price jumps.
11. Audit your own usage before the vendor does– SaaS vendors usually have great data on who is using every product of theirs. But, don’t take their word for this. Your own audit might uncover lots of casual users who should be on a lower cost subscription. You might be paying for subscriptions for former employees. When you’re armed with solid data, you can negotiate your renewal better. Don’t perpetuate inaccurate price increases.
12. Expect deafness from the renewal sales team– Selective hearing from these renewal sales people is epidemic. All they can hear is how much more revenue they need to make President’s Club this year. They don’t hear and don’t care if your firm’s sales are flat or the economy is tanking. I always bring into these discussions a lot of material describing my client’s current and proposed future state. Even then, it irritates me to see not one sales team member take note of this.
13. It’s a warning sign when vendors charge extra for next-gen capabilities like “intelligent apps” - AI, intelligent functionality and automation should be built into the core software and delivered to all SaaS customers, not packaged into a separate add-on. The same goes for analytics. If you get push back on that, show them a Microsoft Power BI demo as an example of the price alternatives you have in front of you.
Lock-in is a state that the customer lets the vendor push them into. That’s right – the customer lets them do it. But vendors that enable this are not to be admired. A smart subscriber doesn’t permit lock-in and doesn’t do business (or renew their business) with bad actors.
My take - SaaS is the game, but vendors' tricks are the same
Bottom line: Many enterprise software buyers experienced lock-in from on-premises vendors. The tricks vendors used were potent then and new lock-in techniques have emerged to keep you paying (and paying more!) in the SaaS world. The biggest mistakes companies make is to think they can negotiate SaaS contracts on their own. There are numerous traps and smart firms get help with the initial deal and subsequent renewals.
To fight potential lock-in situations:
- Get help in contract reviews
- Always be shopping – Be prepared to move to another product should the SaaS vendor get greedy with its renewal discussions
- Avoid vendors whose products require lengthy expensive implementations – You’re locked-in when you can’t afford to switch
- Avoid vendors with opaque contracts and embedded URLs
- Don’t deal with local salespeople – These folks have very narrow limits of authority when it comes to negotiating parameters. If they can’t get you what you want/need, go over their head.
- Avoid solutions that require lots of tailoring
- Implement solutions so that they require minimal switching costs
- Avoid vendors that insist on raising renewal prices beyond inflation rate increases
You have to take charge of this situation. You rarely get locked-in when you’re informed and in-charge. Shift the power back to you, the software buyer, and get the fair deal you deserve.