Contract negotiations for hardware and software assets typically include seemingly extravagant offers from suppliers — $300K worth of “free” licenses or $200K of special equipment added at “no cost.” Enticing as they may appear, the business benefits to customers of such incentives may be largely illusory.
For example, if you as a customer get $100K in discounts on $1M worth of hardware devices, your provider has sold you $900K worth of product. However, if you get $100K of “free” hardware at a 50% margin instead of discount, the vendor is really only providing a $50K discount. Considering the maintenance on the “free” hardware you’ll pay over the three-year product lifespan, the vendor may make more than what they would have made originally by providing no discount.
In addition, incentives that prompt you to buy also lock you in to future purchases – and both the initial sale and recurring revenue make for a good story for vendors to tell industry analysts in hopes of pushing their stock price up.
And, in many cases, freebies of unrelated products or services on a new contract can help a large provider win a customer and eliminate a smaller competitor who can’t offer a similar unrelated product. In many cases a customer could receive that same freebie on a related deal with the same supplier, had they not fell for the illusory trap set up by the supplier.
Put simply, offering free incentives has a serious upside for hardware and software sellers and may offer little added benefit for the customer
Perhaps most importantly, free incentives muddy the waters of negotiation by removing transparency from the true pricing of a product or license. This means the game is played on the provider’s home field and puts you at a disadvantage, because if you don’t know the true price of a product you can’t be sure if you’re getting a good deal or not.
The way to avoid this monopoly money approach is to negotiate based on the bottom dollar price and to insist on total pricing transparency. Once true pricing is established, incentives can be part of the discussion, but shouldn’t define the negotiation. This approach gives you greater insight into spend and allows your purchasing decisions to be dictated by business needs rather than by the special offer du jour. And ultimately, it makes for a better relationship with suppliers.
