Overpaying for enterprise software, cloud infrastructure, hardware and IT services is all too common. Unfortunately, inconsistencies in market pricing can make it difficult for buyers to determine whether a vendor’s pricing is within fair market value range.
Below, we dive into the importance of assessing fair market value pricing for enterprise IT purchases, as well as a few tips to consider before your next transaction.
Why Does Fair Market Value (FMV) Matter for Enterprise IT?
Fair market value (FMV) is commonly referenced in many industries, including IT. Essentially, FMV outlines the “fair” price for something in a market.
The Code of Federal Regulations defines FMV in this manner: “fair market value is the price at which [property changes] hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”
In an article we published a while ago on the importance of FMV, we dug into this definition as it relates to enterprise IT. First, consider the bit on “neither being under any compulsion to buy or to sell.” Let’s be realistic and acknowledge this is rarely the case. In IT, the compulsion to buy or to sell shapes everything in a new purchase or renewal. In some cases, the compulsion to buy is often stronger than the compulsion to sell – which gives the vendor leverage. At other times, the compulsion for sales reps to meet their quotas shifts leverage back towards the buyer. In either scenario, however, a range for fair market value pricing exists, and buyers should aim for pricing that is at least within that range (ideally, better!).
Next, consider a “reasonable knowledge of relevant facts.” As pricing for most enterprise IT purchases tends to be wildly inconsistent, buyers are often at a disadvantage. Why? The most important “relevant fact” – what constitutes a fair price – is difficult to discern when a vendor routinely charges one customer 20 or 50 percent more than the next customer for the same solution.
This is why it’s critical for IT buyers to perform price benchmark analysis on all material IT purchases and renewals to determine if deal pricing is consistent with what their peers are paying for similarly-scoped solutions.
5 IT Benchmarking Metrics to Help You Determine Fair Market Value
How can you prevent overpayment for enterprise IT? There are lots of ways – from negotiating a strong enterprise agreement to software license optimization – but one of the most powerful tactics is IT price benchmark analysis. This will help you determine if vendor pricing is within FMV range and, if not, where opportunities for more favorable pricing exist.
Several factors – we’ll call them metrics – should be analyzed as part of this process. Here are five of the most important:
1. What is a fair price for your solution requirements, regardless of vendor?
Think of this one as a competitive pricing analysis. This is the acceptable cost range for any solution in the market that meets your requirements. Let’s say you’re purchasing a HCM solution for the first time. Based on your unique requirements, what’s a competitive price? Note: this is typically assessed earlier in the vendor selection process, usually before shortlisting.
2. What is a fair price based on what your vendor is charging your peers for a similarly scoped solution?
As mentioned earlier, it’s not uncommon for a vendor to charge one customer substantially more (or less) for a similar solution. Having visibility into these disparities is key in determining FMV for your transaction. The challenge? Most buyers don’t have access to external pricing data. This is why it makes sense to work with objective pricing experts like NPI. We analyze thousands of enterprise IT deals a year and have visibility into what constitutes a fair price for your solution requirements.
3. What is a fair price based on your existing spend with the vendor?
How much you spend with a vendor has significant bearing on whether or not your deal pricing is quantifiably “fair.” This is one of many levers IT buyers can pull during the negotiation process to secure pricing that’s at or better than fair market.
4. What non-price incentives should be negotiated with the vendor?
Negotiated savings fall into one of two buckets – hard savings (e.g. X% off list) and soft savings (e.g. professional service credits or other freebies). Most IT price benchmarking efforts focus on the hard dollar savings. But it’s important not to overlook the value of soft dollar savings, particularly for those IT buyers that have a clear picture of their current and future-state IT roadmaps. A vendor that’s not willing to move on price may be willing to throw in free services, discounted pricing on other solutions in their portfolio, etc. These things may not lower the cost of the purchase/renewal right away, but they can reduce overall spend with the vendor in the future.
5. For bundled solutions, what does line-item pricing look like and how does that compare to competitive alternatives as well as what your peers are paying?
Vendors love to bundle their solutions – particularly enterprise software vendors. The challenge is bundled pricing obscures what customers are paying for each component, and whether that pricing is within fair market value range. And considering most customers don’t end up using everything in the bundle, the opportunity for overspending is a double whammy. NPI strongly recommends customers demand line-item pricing to be sure they’re paying a fair price for the elements they actually plan on using.
NPI: Fair Market Value for Enterprise IT
At NPI, we provide actionable, transaction-specific information that eliminates IT buying blind spots. We lift the veil on market price for IT purchases through four primary steps:
- Validate: We objectively determine whether you have a best-in-class offer and, if not, quantify (and close) the gaps.
- Optimize: Define the licensing, subscription, and business terms that best fit your company’s needs.
- Negotiate: Arm you with vendor-specific intel and leverage so they can negotiate the best deal possible.
- Align: Get your IT buying team on the same page and working toward a defined, shared target outcome.
If you want to learn more about NPI’s IT price benchmark analysis services, contact us. We’d be happy to discuss how our 100% objective IT procurement advisors are helping organizations like yours save millions each year.
RELATED CONTENT
- Bulletin: 10 Reasons Why IT Buyers Should Perform Price Benchmark Analysis
- Blog: It’s an Exciting New Era for the Art and Science of IT Procurement
- White Paper: How to Eliminate Toxic Spend on Large SaaS Estates and Reduce SaaS Costs
- Webinar: Pricing Analysis and Negotiation Intel for Best-in-Class Purchasing
- NPI Service: IT Price Benchmark Analysis & Contract Negotiation Intel