Vendors have to make money to stay in business. Like it or not, it is in our best interest for our strategic vendors to make a profit off of our business. After all, win/win is the best way to sustain a long term strategic relationship.
If they don’t make a profit off of us over time, they will fire us. Yes, vendors do that — mainly by acting like a bad vendor until we go away. Or just tell us no the next time we want to place an order. Or dramatically raise prices.
If we understand how a vendor makes their profit, we also can understand where we have negotiation leverage. Just because we are ok with them making a profit, doesn’t mean we can’t negotiate to our benefit.
Let’s look at a few ways vendors can make money off us.
One time purchase price
Straightforward purchase price. Used by all small hardware and software products. We buy it; the vendor takes their money and we go our separate ways. In the case of small software packages, we will need to buy it all over again when the next version comes out.
Initial price plus annual mainternance
Larger software and more complicated hardware vendors use this model. Software maintenance is up in the 20%-22%. The maintenance money goes to fund new products. No maintenance $$$ means no new products.
You don’t see this too often, but it can be there on more complicated systems. The systems need advanced technical assistance getting setup so they will charge heavily for it.
This is what many vendors are trying to get to: a sustained regular payment from customers. Income becomes more predictable for both customer and vendor. Subscriptions can be great for us, but watch out for long term lock-ins.
Similar to implementation fees, these are the costs for experts.
Selling our information
No one enjoys talking about it, but vendors do this more than we wish. Look for absolute statements about this and be careful of weasel words.
So what good does knowing how a vendor makes a profit do for us? It helps us understand where we can negotiate. If you can figure out the primary profit source, you may push harder on the other areas. You can also ask for things that won’t impact their profit directly (schedules, people, etc.). Be creative and look at how both you and the vendor can benefit.