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

CPI Caps are to Contracts what the Railroads are to Monopoly.

I have always argued that CPI caps are the Monopoly Railroads of contract negotiations: highly coveted and extremely valuable, one would be crazy to part with them.

OK, the analogy only takes you so far, but you get my point. If you can negotiate a CPI cap to your contract (perhaps even in a Master Service Agreement), you are setting yourself up for greatness.

What's a CPI cap you ask? Simple: it's a cap on how much a vendor can increase your prices based on the Consumer Price Index, commonly known as inflation.

In contract negotiations, I will often attempt to get a price escalation clause included for a service. It is more common to see these with larger vendors like S&P Global and Thomson Reuters, which offer services where demand is relatively inelastic -- and therefore predictable.  In return for this stable, recurring revenue, a vendor may be comfortable with a cap on price increases. Nevertheless, do ask for these clauses with smaller vendors - you'll often be able to get them added.

An escalation clause may read something along the lines of:

"Beginning on the anniversary of the Effective Date, and upon the each succeeding anniversary of the Effective Date, Provider may increase the-then current price of Service by U.S. C.P.I."

A couple of points here.

First, make sure it's indicated exactly what is meant by C.P.I. The Bureau of Labor Statistics in the United States published dozens of different consumer price indices. The CPI I see used most often is the Urban Consumer C.P.I., which is the broadest measure of consumer prices in the U.S.

Next, be careful to specify which category you want to use - you may want to exclude energy prices, which are highly volatile. You may want to limit it to the category the most closely matches the industry you're purchasing from. And you may want to define geography, such as City Average. But as a rule, Urban Consumer CPI All-items will often suffice.

I also recommend to specify to use Non-seasonally adjusted indices: seasonally adjusted indices are subject to change and can add unnecessary confusion into your contract.

Finally, do you want to have floors and ceilings on C.P.I.? We've been spoiled for the last 35 years with relatively stable consumer prices (apart from housing and healthcare of course), but in a period of high or even hyper-inflation, how would you feel about paying a 15% increase next year for the same service? It's unlikely, but why take the chance? Similarly - and this is rare - what if C.P.I. actually goes down? Do you want to be able to reduce your cost next year?

With these factors in mind our example price escalation clause reads more like:

"Beginning on the anniversary of the Effective Date, and upon each succeeding anniversary of the Effective Date, Provider may increase the then-current price of the Service by the last twelve month percentage change in The Consumer Price Index for All Urban Consumers (CPI-U), U.S. City Average, All items, not seasonally adjusted, as published by the U.S. Department of Labor ("Index"). Notwithstanding the foregoing, the price for the Service shall not increase by more than 5% from the-then current price. In the event the Index declines during the applicable calculation period, the renewal price shall reflect this, but not to exceed a decrease of more than 5%."

Feel free to add an example calculation to this clause as well, and reference the actual URL from the Department of Labor's Bureau of Labor Statistics that shows the C.P.I. you want to use. Leave nothing to chance!

Caution: be aware that an escalation clause can often be accompanied by a volume or spending floor: you're required to maintain a certain spend with the vendor upon renewal in order for the cap to be applied.

Price caps can be a great addition to any contract and can help with your budgeting immensely. It never hurts to try to get one added to a contract.

None of the forgoing should be construed as legal advice. Consult a competent attorney before signing any contracts!

- Kevan Huston

Are Enterprise Subscriptions Worth it?

Managers are often given the opportunity to contract for "enterprise" or "group" level subscriptions to web-based resources like MergerMarket or Pitchbook.

These subscriptions at first glance appear attractive: there's no per user or flat-rate cost for each seat you use.

Suppose a vendor comes to you with two contract options:

Per-user: $150/mo. per user, no tiered pricing (each new user is $150 pro rata);
Group: $2,000/mo. for Group access. The Group has 20 people in it. That's $100/user per month!

It's a no-brainer: simple math tells you to take Option 2.

No so fast.

Not all your users in the group have roles that benefit from the service. You may provision each person with the resource, but how many actually need the service? And how many will use it? How often?

Let's suppose you have a time machine that allows you to zoom ahead a year and see how the product ends up being used. Your future data shows that while you may have 20 subscribers, only 5 people are front office, and of those, only 4 people used the service at least weekly.

Your data are telling you that of the 20 people licensed for the service, only 4 are meaningful ROI+ users.

So if you were on a per-seat license, you'd be paying $600/mo. versus $2,000 a month for the group license.

With Option 1 you're paying $150 a month per user for four active users. With Option 2 you're paying $500 a month per user for your four active users.

This analysis tells you to take Option 1.

Absent a time machine, what should you do?

My recommendation is to start small with a limited, preferably per seat, license. Your unit costs may be higher in year 1, but you will have good qualitative data on the utility of the service, and, using a service like Research Monitor or OneLog, you'll have quantifiable data on usage patterns as well. Word of mouth from subscribers will potentially drive interest from other members of the Group, thereby justifying a switch to a group license upon renewal.

Start small, force the vendor to demonstrate actual value, before you go enterprise.

And remember, you can always repaper a contract before the term ends! If it really looks like the ROI is there for a group license, renegotiate - nothing is written in stone.

- Kevan Huston