Customer paying a lot of money, but asking for unreasonable contract terms
Hi everyone!
I run a productized service. This year, my first large customer came onboard ($30.000 / year). This is 10x bigger than all my other customers.
We have a good relationship. They require some customizations but it's reasonable. They are a great reference, and will be useful for acquiring other large customers. They are interested in a long-term relationship.
Now, after 4 months of working together they want to expand their contract. That means I need to operate additional servers and hire more freelancers. I quoted them a price of $100.000 / year. This is cheap considering my own expenses will increase tremendously.
They came back with two requests:
First, they don't want to pay a fixed fee anymore. Instead, they want to pay my expenses, plus a "salary" for me.
Second, they want to hire someone at their office who will work with me. That person would get direct access to my systems, and help to "guarantee quality". That person would help me, and I can decide who gets hired. Sounds like a terrible idea - our two companies would get mingled up, and I'd lose my independence.
I believe they want to reduce costs and gain more control over my company. Both of their demands seem unreasonable to me, and could create massive problems.
How would you handle that?
I am inclined to reject their demands. If we can't agree on a new larger contract, we will simply continue with our existing, smaller contract. And the most important goal is to find other large customers, and not focus too much on one.
Typical move. They're trying to fuck you over.
It capitalizes on inexperience and tries to turn you from a business into more of an employee.
You run a business. Go in prepared to lose the client and put in the work to find new clients in order to maintain your business, or you'll be at a disadvantage.
This comment was deleted 7 years ago
Are they aware they are your strategical revenue source?
If they do, then they try to use their position to basically merge you into their operations without buying you or being held responsible if s*** hit the fan.
This is business negotiations - you have right to refuse their offer.
Apparently, they see value in you and try to suck that value out of you so you might have a stronger position than you think.
The main question is how big is this company.
Also:
"I quoted them a price of $100.000 / year. This is cheap considering my own expenses will increase tremendously." - then you should increase that price. For larger companies difference between $100K and $115K/year is close to none, but for you?
Yes, I am pretty sure that I'm in a strong position. They already spent a lot of effort to integrate everything with my system. They definitely have a good commitment. We do need to figure out terms that work for both of us.
Thanks Bart. I've been using a similar approach, with "If you want to save costs, we can always cut feature X out, or reduce the amount of data we process for you, or remove <extra service XYZ that requires my staff to spend time every month>".
Yeah, that works, especially for difficult customers. I simply prefer adding cost, than giving discounts. It helps avoiding working with some of them, and ones that pay make me happy, so why not ;)
They don't have your best interests in mind, so you've got to come at them with a counter-proposal.
Whatever your business is, it's worth a lot to them. Bearing that in mind don't be afraid to say "no." They want to get to yes.
Second, it's better to price yourself out of the market than say "no" explicitly. So what would this be worth to you? For instance, would you consider becoming an employee for $200k a year? That's wildly above your original quoted price, so that's what we call your "fuck you" number. It tells the client "fuck you" without actually saying those words. The best part of a fuck you number is sometimes they surprise you and say "Okay" and now you've got a $200k a year job.
It sounds like you may have been a little too candid with revealing your costs and other operations to your client. Here's the rub: If they're willing to hire an employee to work with your systems as well as cover all your costs, it's clear what they're doing: They're trying to figure out how you built what you built so they can rip you off and turn around and sell it to their competitors. Don't let them do that. If they want to buy the business from you, you give them a number. Make it another "fuck you" number if you prefer, but don't let them take control of your operations or you'll soon find they've acquired your company without a buyout.
Last, before this relationship ends: Call all their competitors and ask them if they'd like your service. Tell them how much this company loves it and how much it's improving their revenue or customer retention or whatever. You're likely to get a few sales immediately, and then it'll be easier to say "fuck you" to your largest client.
This guy fucks.
There is some reason behind their unreasonable demands. And it looks like you're guessing what it might be.
You've mentioned that you have good relationship, so would it be ok for you to say to them that you are uncomfortable with their proposal and probe for what are their reasons to ask for that?
It could quite be that if you can find out what their interest is - rather then concentrate on their unreasonable position - you would be able to find solution that will satisfy both of you.
Hey @Architekt , you are way ahead of me so I don't have much to say, but check Steli Efti's interview here on IH recently. https://www.indiehackers.com/forum/the-path-to-improving-as-a-founder-and-generating-millions-in-revenue-with-steli-efti-of-close-io-21c3907efa?commentId=-LDKn45FLuK6_YHQH7GU
He talked about taking the clear position of being a product company, how big companies keep testing him to keep customizing things or negotiating down the price. He showed that you can very politely refuse and stay in course.
He is prepared to lose that customer because the future of the product is what truly matters. Sometimes the big customer will actually stay anyway. They will say "there's no way we will use your product if you don't change this (feature, cost)". But when you don't budge, they often use it anyway 😆.
Lots of good replies so far. Their terms are bizarre and if they tried it with a mature business with a professional sales team, they would get laughed at.
Certainly don't give them access to your source code or administering your systems. That is absolutely unreasonable. You will get woken up at 1AM some day, all data gone, customers screaming, because their guy gave the password to someone else in their IT organization, who has logged into make a "quick fix." If you are handling confidential data for other customers, you would be in a very bad legal position if you did this as well.
BRAIN RAPE.
Leverage your current revenue to find more customers & fast. I'm pretty sure their customers don't pay their cost + a salary.
DO NOT give them access to your system. You are an entrepreneur who obviously provides value. Sounds like they're trying to get access to your system to extract that value.
$100k/ yr is nothing... that's the cost of a single employee, so their proposition is nonsensical.
Perhaps somebody else can highlight something I'm missing, but IF IT TASTES LIKE A TURD, IT PROBABLY IS A TURD.
That being said, this is a negotiation and the size of the pie is not fixed. Perhaps it can be expanded in another way that helps both companies achieve their respective goals, but that should not include giving them yours.
I work everyday providing support for customers of prominent startups, and I've never seen a contract like yours.
If you have a high-paying customer, you're better off writing a reasonable Service Level Agreement wherein your customers don't have actual access and power over your business, and you just have to guarantee quick responsiveness, performance and reliability.
You show be careful working with companies that strong arm you like this. They have shown you their true colors and don't strike me like the type of customer you would want, even if the money is good.
It seems like they are looking to get your services dirt cheap, but in a way that may possibly prevent you from growing as a business. If you wanted to offer your services to their competitors, would they still have access to all your systems, would you be comfortable having their staff in your office in terms of privacy and any non-disclosure agreements to your other clients? Would this interfere with your ability to expand?
If each of your larger clients wanted to make a deal like this, would you make it with each of them? Would that work in terms of logistics, privacy, etc. growing to meet the needs of every client?
It kind of sounds like they are trying the equivalent of an "on-premises" installation, but without having to maintain the servers themselves and paying less than even SAAS prices ("on your premises" installation). If they want on-premises installation, you might be able to work out a deal that way, but those can be higher-prices than SAAS sometimes. That could allow them full access to the systems with their own employees and they get to pay full server costs, then they pay for the licensing and support from you.
It sounds like your services are worth it to them, and perhaps so much so that they want to try to exert more control over it; but if it is worth that much to them, I'm sure you can work out some other deal that will meet both your needs and theirs. The reality is that businesses pay quite a bit for services, because services are worth it. To my way of thinking, they should be prepared to pay what it is worth in realistic terms.
Yes, this is exactly what it sounds like. Of course, on-premise would reduce their risks. I'm pretty sure that they wouldn't be able to afford a reasonable on-premise pricing. And it's not desirable anyways. It's a productized service that needs some manual work, not just a piece of software.
Appreciate all your replies, A LOT. I got many great insights. I think I'd definitely be open to creating an on-premise version of my system! It would be difficult, but would offload a lot of responsibility to my client, and I would charge a significant up-front fee.
I communicated my boundaries clearly, and rejected their proposal. The message arrived clearly. We agreed to wait a little bit, think about it, and discuss again in the near future.
Don’t do it. That is all.
The only way I would consider their offer was hiring someone and allocate in the project, just like they will do.
.."and I'd lose my independence."
This is the key point. Don't lose your independence. Tell them you appreciate their new offer but it is not in the best interest of your business to work for them solely on "salary". Sounds like they are now trying to buy you out and have you work for them more exclusively. Don't do that otherwise you lose opportunity to find other clients who are bigger.
The whole point of running a business is that you do not want to depend on one large client/account even though it can be lucrative. Tell them No in a polite way and they will understand considering they have been reasonable with you so far.
This comment was deleted 7 years ago