The fresh furry framework on contract negotiation
The fresh furry framework on contract negotiation
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Everyone has tips on negotiating, but when's the last time you heard a fresh new (furry) framework for contract negotiation? I'm back at it with a weekend 🧵.
Fun fact: I would present a version of this Contract Negotiation 101 at Chime all-hands in the early days. Enjoy!
Now you may be asking - "Who is this guy and how is he qualified to lead this 101?" I was the CFO's first hire at Chime and for a while we negotiated every single software contract, vendor deal, real estate lease and strategic partnership. We became masters of the craft.
Now when we talk about contract negotiation, we have to use a consistent framework. And I know what you're thinking. He just said "framework" - that's business school talk. He's probably going to lecture me on:
B - Best
A - Alternative
T - To
N - Negotiated
A - Agreement
But wait a minute... I didn't go to business school... I went to startup school! - Said no one, ever (except Samir at an actual all-hands once).
So I can't tell you anything about BATNA. What could I offer for frameworks? Well I do have a CAT. And she's pretty FAT. And that's when the lightbulb went off.
Use FATCAT!
F: Forecasts (get vendors excited about scale)
A: Add-ons (& bundling can lower price)
T: Terms (& commitments de-risk deals)
C: Competitors (can benchmark fair pricing)
A: Another Round (of negotiation creates opportunity)
T: Timing (& testimonials seal deals)
F: Forecasts (get vendors excited about scale)
Start a negotiation with a forecast. Give vendors a reason to continue the discussion and show why it makes sense to partner. Don't leave forecasts to them. Just remember - DIY forecasts are hard... but Finance can help!
A: Add-ons (and bundling can lower unit price)
Adding on services (A) gives you more features you want from the product and (B) shows vendors you're interested in expanding the use case and the partnership.
But you need to control the conversation around bundling - it doesn't always make sense. Here's a legendary bundling shutdown email from a member of the team:
T: Term (& commitments de-risk deals)
Moving from monthly to annual lowers volatility of deals and commits to long-term partnership - Paying upfront vs. monthly also helps vendor secure cash If you can afford the cash flow, these are good ways to drive discounts.
C: Competitors (can benchmark fair pricing)
On its own, it's hard to tell if a vendor's price is reasonable. But comparing them side by side (A) gives you more comfort in fairness and (B) forces vendor to match or lower prices to compete.
Remember - you don't have to be seriously considering other competitors... You just need to have done enough diligence on viable alternatives that you can convince the vendor to be competitive. You should be looking at competitors as part of good process anyway.
A: Another Round (of negotiation creates opportunity)
Think of a negotiation as happening over multiple rounds so you can get past rack rates to get to the real prices. At each stage, provide more info to pull more levers versus giving everything away in one round.
Round 1: Vendor offers a price. This is MSRP. This isn't a real price. No one pays MSRP! It's time for a counter to re-anchor the conversation. Don't let them anchor you to MSRP. It's time to pull in new data to help you pull a lever on pricing.
Consider competitor data that can shape an explicit counter.
OR send a forecast that gives a better sense of scale (and a reason to re-state price).
OR use add-ons or term to ask for lower pricing than what was initially stated. You're helping vendors make your case.
Congratulations - you've made it to Round 2.
Round 2: Vendor has new data and needs to respond by offering a new deal or countering your counter. Use add-ons, terms & other new info for new rounds and more discounts. (Rinse & repeat as needed, but don't overuse).
And remember - you've always got an extra round for escalations. Bring in the Finance team or a senior decision-maker to add one more round to the negotiation and one more chance to reduce pricing.
T: Timing (and testimonials seal deals)
Accelerating deal timing is a great way to get some final extra price movement. Parallel process w/ Legal so deal docs ready to go when pricing convos are done. Offer to sign earlier or before EOQ to beat sales quota deadlines.
And don't forget the power of a testimonial / logo / case study. People underestimate the power of a logo on a website. But think how often you chose a product because of who uses it. The same is true for business products. Your company's brand has value - leverage it.
What did we learn?
F: Forecasts (get vendors excited about scale)
A: Add-ons (& bundling can lower price)
T: Terms (& commitments de-risk deals)
C: Competitors (can benchmark fair pricing)
A: Another Round (of negotiation creates opps)
T: Timing (& testimonials seal deals)
