But Wait - Why Are You Increasing My Price at All?

In a post yesterday I advocated for CPI caps when renewing a contract.

But wait - why accept a price increase at all?

Think about it: vendors have us conditioned to believe that, year after year, the price of their product will simply go up as though by some universal and unyielding law of nature.

But why? Have you ever just straight up asked a vendor why they're raising prices?

Do it. Expect answers will be along the lines of:

1. We're rightsizing your contract to be line with the pricing of other firms like yours;
2. You've been on a discounted rate for several years now and we're aligning you with our rate card;
3. We're making some investments in the service that we think you will really appreciate;
4. We see that you're getting tremendous value out of the product and want to strengthen our partnership going forward

None of these explanations justify a price increase.  Consider the following counterarguments: 

1. There is no "rightsizing" of a contract. What you pay relative to other firms is not relevant - and not your problem. My response to this claim: we take that as a compliment to our negotiating abilities! Please send our regrets to our competitors that they weren't able to negotiate such a deal. 
2. Discounted rates are meaningless. There is no "rate card" - this isn't McDonald's. Price to value is the only metric that should matter. What value are you getting from the contract, and at what price? The only trend line that should matter is what you have been paying historically. 
3. Capex is one of my favorite topics to negotiate with vendors. I talk about it here. I'm not going to subsidize your product development unless I can thoroughly evaluate the value of the product enhancement first. 
4. This doesn't mean anything. If a vendor wants to strengthen the relationship, they can lower our price. 

More generally, when confronted with a price increase and there's no evidence of value-add, that it's simply an inflationary increase, I point to the reality of vendor's business model.

Content syndication, like SaaS, is a highly scalable business with low variable costs. All things being equal, why should our price go up 10%? Have the vendors Cost of Goods Sold gone up 10%? Highly unlikely. After R&D and editorial, most revenue in a well run content business drops to the bottom line. If a vendor publishes a research report, the costs of selling that report to a marginal user is minimal. So that 10% increase is likely just profit for the vendor. Why should you hand over that margin to them? 

Here is where, as a concession, a CPI clause can possibly be negotiated. Any more than that is highly suspect: what, apart from government manipulated markets like healthcare and education, goes up 10% y/o/y? The claim is frankly absurd - particularly in a highly scalable business like content syndication. 

This all assumes, of course, that even a flat renewal is acceptable. There are instances where a price reduction could be warranted, which I will address in a subsequent post. 

- Kevan Huston