A Conundrum

Today I joined a call with a fellow procurement team member to speak to a supplier about an amendment to their contract.

My colleague had done the original contract and it was a time and materials contract for the enhancements to the supplier’s existing software. As a part of the contract, the supplier gets to keep the code and we pay an annual license fee to use the stuff.

What started as a small procurement with a junior procurement hero has started to get traction. The Client is happy with the steep adoption ramp of the software and has asked that I negotiate forward pricing. He needs to reliably predict how much budget is needed to stay ahead of use on the SaaS product.

Perfect. All the right questions are being asked and all the right forward thinking about use and deployment is being considered. From our side, anyway.

As I joined the call, I heard the person we are dealing with from the supplier introduce himself. He’s the owner and CEO. This is a very small startup. And that’s where things get tricky.

Working in the IT commodity means that purchasing from startup companies is very common. But it’s not easy. Never easy.

Our current agreement covers us for up to 1,500 licenses. We’ve already hit that mark. And passed it. Wave buh bye to 1,500 licenses in the distance.

So I asked CEO for his next license/price threshold. He replied, “Well. I don’t know if you have looked at our published price list. The highest level we go to is 1,500 licenses. We’ve never had anybody go more than that.”

Oh dear. The Client says he contemplates needing 15,000 licenses within the next two years. The Supplier says he’s never even dreamed of usage that large.

This is a problem. Potentially a good problem. Being a big early adopter means we have some say in the direction that the product moves. We can get some concessions. We can help the supplier have steady business and a reference account, and that helps everyone.

However.

It also means that the supplier is in a bit over their head on how to price this. They need to put some numbers on the table that are high enough to cover their costs of expansion but low enough to keep our interest.

Pricing is a difficult topic. For a small business, price it right and you have a solid foundation. Price it wrong and you are on the ropes.

The CEO of the supplier said, “Well, maybe you can help guide me how you want pricing to be.”

Warning! Alert! Red Flag!

This means two things 1) he doesn’t have a clue how to scale his pricing and 2) if I tell him how to price it and he loses money on the deal, he can blame The Company. “Well you TOLD me to do it that way.”

Ugh.

So how does a Procurement Hero navigate these tricky waters?

“Well, I certainly can’t tell you how to run your business. I’m sure your pricing team…”

Yeah, I used the term “pricing team”. I wanted him to know I am giving him the benefit of the doubt here. With a small company like this you have to show you believe in them.

“…I’m sure your pricing team can come up with something that is fair for both sides. As a small business, it’s in both of our best interests for you to earn a fair profit while we pay a fair price…”

This seemed to bolster him up a little. He said “Ok, I think I know what you need here. Let me work something up and get back to you in a few days.”

We wait and see.

And let me add on here, if the CEO is running the company, doing sales, and is also the pricing team, I worry about their ability to scale from 1,500 to 15,000 users.

Questions, questions. I have lots of questions. And I’ll keep asking them until I figure out how to best manage this risk.

When it comes to very small businesses, managing (and accepting) risk are just part of the game.

Now I wonder how long it will be before some big monster company gobbles them up. Let’s hope I can get my kick butt pricing into a contract and in place well before then.

Image found here.