In this article, we will explore what software contract price benchmarking is and why it is important. We will also discuss the advantages of regularly performing software contract price benchmarking to create value.
What is software contract price benchmarking?
Software contract price benchmarking is the process of reviewing and analysing the price of individual licenses relative to what other organisations are paying to identify if they are market competitive. To ensure accuracy, the contract must be benchmarked to contracts of a similar type, size and duration.
The objective of software contract price benchmarking is to identify if the software being purchased is in line with what other customers are paying. Benchmarking provides valuable insights that can help organisations avoid overpaying and uncover hidden fees. It ensures transparency in pricing, helps in identifying cost saving opportunities and strengthens your position during negotiations with suppliers.
This can be particularly useful when you are looking to reduce the cost of your Microsoft Enterprise Agreement renewal for example.
Why do you need to perform software contract price benchmarking?
In today’s digital age, businesses rely heavily on software to drive operations, improve productivity, and maintain a competitive edge. These investments form a significantly increasing proportion of an organisation’s budget. But how can you ensure you're getting the best deal on your software contract?
This is where software contract price benchmarking comes into play. It’s an essential process that ensures your business is paying competitive prices for the software it relies on. It is also a key procurement tool for how procurement can help to mitigate the impact of inflation and drive cost reduction.
Let’s explore the benefits of performing software contract price benchmarking and why it is crucial for companies looking to maximise their Return on Investment (ROI).
The benefits of regularly performing software contract price benchmarking
Cost saving opportunities
Software providers often have varying pricing models based on factors such as number of users, features, or service levels. They also very often (and purposefully) do not make their prices public. Their discount levels, therefore, vary considerably by product and license type. Further factors such as customer type (existing or new), and customer sector as well as the time that the deal was concluded, will cause further variations in pricing.
Comparing prices at an individual license level identifies where an organisation may be overpaying for their licenses. Conversely, it may also help identify where they are below market rate. We typically see organisations will be overpaying by 20%-30% on average for their licenses. This can add up to a significant saving amount when applied across an organisation’s full software expenditure, helping to realise immediate savings by renegotiating with existing suppliers or switching to an alternative supplier.
Identify hidden costs and prevent overspend
Software contracts can sometimes include hidden costs, such as additional fees for storage, support, or extra usage. Software contract price benchmarking helps identify these potential charges by providing insight into how similar contracts are structured in other organisations.
Benchmarking allows you to uncover hidden costs before signing a contract, ensuring that you only pay for the services that add true value to your business.
Strengthens your negotiation position
One of the biggest advantages of software contract price benchmarking is the leverage it provides during negotiations. Armed with detailed benchmarking data to the license SKU level, you have evidence of what other businesses are paying for their software, putting you in a stronger position to negotiate fair pricing and favourable terms.
A supplier is more likely to offer competitive pricing when they know you’re informed. Therefore you can confidently request discounts, additional services, or better terms. You are not asking for them to approve new discount levels, only for what they have done before.
Promotes long-term cost efficiency
A good deal today doesn’t guarantee cost efficiency in the future. Software contract price benchmarking helps businesses evaluate the total cost of ownership (TCO) over the lifetime of a contract, including potential renewal costs, price increases, or added user fees.
By regularly benchmarking your contracts, you can ensure that your software costs remain competitive and fair over time. This way, you’re not stuck with a deal that becomes too expensive as your business grows or changes.
Provides transparency and accountability
Many software contracts bundle licenses in ways that make it difficult to assess the true price of each component, Salesforce for example is very good at this tactic.
Software contract price benchmarking breaks down these bundles, allowing you to compare individual licenses and see how they align with the market.
Transparency is critical when managing your relationships. Benchmarking ensures accountability and helps you hold vendors to fair pricing and performance standards, making sure that your investments deliver real value.
Improve budgeting and forecasting
By providing valuable insights into market trends and pricing standards, software contract price benchmarking aids in financial forecasting. It allows you to set realistic budgets for future software renewals, upgrades, and new purchases.
With clear benchmarking data, you can make more accurate financial plans and forecast your software spending, ensuring that your budget aligns with your company’s long-term growth goals.
Optimises supplier relationships
Benchmarking not only helps you get better deals but also sets a precedence with your software suppliers that you are willing to challenge. This stops suppliers from becoming complacent.
When you engage in software contract price benchmarking, you set clear expectations that you will not simply accept their price without making sure it is market competitive and backed up with clear rationale. This will discourage the suppliers from trying to increase prices as they will know that you will not simply accept.
Conclusion
Software contract price benchmarking is a powerful tool for any business looking to improve how they manage their software expenditure and deliver cost savings. By comparing your contract pricing to the market, you gain critical insights that ensure competitive pricing, foster transparency with suppliers, and prevent hidden costs. Regular benchmarking also empowers you to make smarter financial decisions, maintain long-term cost efficiency, and ensure that your software spending aligns with your growth objectives.
Whether you're renewing a contract, negotiating with a new provider, or ensuring you’re getting the best value for your investment, software contract price benchmarking is an essential practice that can save your organisation money and improve your ROI.
By focusing on these key points, your organisation can leverage software contract price benchmarking to ensure that you’re optimizing your software investments and driving long-term value from every contract.
How can Swan Procurement help?
We can provide software contract price benchmarking to a micro SKU level for over 13,000 Tier 1 & 2 software suppliers. Leveraging our unique market intelligence data, we can very accurately identify any pricing and demand discrepancies which can be a source of significant savings. We can support negotiations either indirectly or directly.
We are experts in optimising technology supplier expenditure, reducing supplier risk and accelerating procurement maturity. We combine deep specialist knowledge with data insights to deliver a range of services from technology contract benchmarking to procurement target operating design. We will work alongside you as your trusted partner to solve your procurement challenges. Please contact us to discuss how we can help.
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