Bending over: How to sell to large companies

This is a guest post by Steve Hanov, who blogs about programming and startups.


For a micro-ISV, selling to big businesses can be more lucrative than selling to consumers. Instead of making a few dollars per sale and hoping for thousands of sales, you sell to only a few customers, and charge much higher rates. But the rates are high for a reason. It takes more time and money to sell to businesses, especially the big ones.

Legal Issues

Consumers rarely read software license agreements. Most corporate customers don’t read them either, but some have legal departments that must approve any agreement that the company makes, no matter how small. Your EULA will be examined with the same fervor as a billion dollar acquisition.

The license agreement’s primary purpose, then, is to get past the customer’s legal team quickly, because they stand between you and a sale. It helps if it is fair and well balanced at the start. That way, if they add crazy one-sided terms, you can negotiate without sounding unreasonable.

Some terms that you may be asked for:

  • “If you go out of business, we get all of your source code.” The request is common. The customer sees it as an insurance policy in case a smaller supplier disappears, and the assurance it provides may be so important that they are unwilling to drop it. Source code escrow services will hold on to your source code for a fee (hint: get the buyer to pay). Opt for a more informal arrangement if they don’t specifically ask for this service.

    [Editor's Note: When this has come up I've always used the same line: "We're happy to put code in escrow.  You set up the escrow agent and bear all costs."  Every time this policy was accepted without a fight, and never did a customer actually set up the escrow!]
  • “If someone sues us over your product, you have to pay our legal costs.” Indemnification is also a standard clause that is difficult to get removed. If you can’t stomache any risk of personal bankruptcy, incorporating your micro-ISV is a must.

    [Editor's Note: Incorporating isn't enough because usually lawsuits with small companies name the primary owners as well as the company. You also need an umbrella insurance policy for yourself. You have to allow the indemnity clause, but your lawyer can help you craft words that ensures, for example, that damages cannot be greater than the money the customer spent, or that they can seek damages only if the customer themselves are successfully sued for damages, and not just that they got sued at all.]
  • Support details. Are you going to be providing free technical support for this product in perpetuity? I hope not.
  • “What happens if the product is defective?” It’s only fair to offer a full refund if the customer is not satisfied.

A good software license agreement that you can re-use in a variety of situations can cost anywhere from $1000 to $5000. It pays to shop around.

[Editor's Note: Most small companies start by copying a EULA from a similar company, possibly even a competitor.  That's a copyright violation, but perhaps you can use it as a guide with a lawyer of your own.]

Quotes

A quote looks just like an invoice, except that it has an expiry date. Sixty days ought to be long enough for the client to make a decision, even if the whole department goes on consecutive vacations.

Even if you publish your prices on your website, many companies require a formal quote anyway. This is a document they can put in their system, not something fleeting and changeable like a website.

Make sure you get this right; if your eventual invoice deviates from the quote they’re going to scream bloody murder.

Evaluation Version

The purchasing process can take a long time, so you might be asked to provide an evaluation version while the details of the sale are worked out. It is unclear whether the customer acknowledges any of your license terms during the evaluation period, so the product should have a time limited expiry and other technical measures to ensure compliance.

[Editor's Note: It's impossible to be strict with an evaluation timeline. There are counter-arguments to the following (and please leave those in the comments), but in my experience big companies move slow regardless of how much of a hard line you want to have with the evaluation period.

However you can still use the timeline to your advantage. Still have a time limit, then when they inevitably need more time, you have an excuse to say things like, "Well I could try to get permission to extend the deadline, but I need to tell my boss something. Is there progress on getting the sale done? Are there any technical barriers we need to remove?" In other words, gain information about what they're doing and at least secure another step forward in their purchasing process.]

Purchase orders

You and the end users of your software have patiently waited for five months for the company’s legal team review your license. Now, the signed copies have been faxed (yes, faxed!) back and forth. At last, they’ll click on that Paypal button on your order page…

Think again. Once a large business has agreed to buy your product, you are expected to send it to them for free. They do not have to pay you a dime until they feel like it. Instead, they will send a purchase order — a document saying they intend to pay eventually.

The good news is that purchase orders are a legally binding promise to pay you, after all of the terms have been fulfilled. Here is a diagram to illustrate the procedure:

Click to Edit on WebSequenceDiagrams.com

If you are lucky, they will use PDF files for the purchase order and invoice. But you will probably have to send and receive some more faxes.

[Editor's Note: "Waits exactly 29 days" is optimistic. Often they pay much later than the stated deadline. Yes you can try to impose late fees, but good luck collecting on those. Probably not worth your time anyway.

Another mistake I made early on was to send invoices before the PO (Purchase Order) was received. Invoices that don't include a valid purchase order are automatically rejected.]

“Please read this 100 page document about our invoicing process.”

Sometimes, after everything is agreed, you’ll be asked to perform some kind of insanely complex invoicing procedure. The instructions are laced with stern, upper case warnings that if the invoice doesn’t follow the proper format, lacks item category labels (found in document B), or is submitted during the wrong hours, it will be ignored.

If you have priced your product appropriately it will be worth it to spend a few hours to learn their codes and procedures. If the price is too low, you can try your luck and (politely) ask if there are any other options. (Do not mention why!)

[Editor's Note: Companies with complex purchasing procedures are also used to spending more for software. It's OK to ask about what their purchasing process is like before you send the original quote. If it sounds complex, it's appropriate to add extra charges to deal with it. However, mask it as something like "installation support" and not "coping with your ridiculous payment system."]

“We will release the funds after you provide your US social security number.”

US customers will sometimes ask for a Taxpayer Identification Number (TIN). If you are not a US taxpayer, you don’t need one. Once you point this out, they may be okay with it, or they will ask you to fill out a US form W-8BEN and send it to them. The form is scary because it states that your “income” will be subject to a 40% withholding tax. Don’t worry: the purchase price is not “an amount subject to withholding”, and sellers do not need to start doing US taxes (if they aren’t already). Some US businesses feel that they must keep this form on file for all suppliers, and it’s easier to comply than argue. Here’s some more information.

[Editor's Note: In the US there's never a reason to give out your SSN.  Instead, get an EIN (Employer Identification Number) from the IRS. This is what will appear on all your legal forms with customers as well as your corporate tax returns. You don't need to incorporate first.]

“We only pay using Bankers’ Scrolls made from papyrus”

Many companies have a policy against using Paypal. It’s best to use an old fashioned check if you can. You can suggest, but never insist on a method of payment. Money is money! Some international customers only use bank transfers. If so, call your bank for the information that you need to provide them, and expect about $30 of the payment to go to fees.

[Editor's Note: Smaller banks often have ridiculous multi-hop procedures for accepting international wires. If you must use a smaller bank (e.g. maybe a smaller one offered you a bigger line of credit), still have a working account at a bigger bank for things like international transactions.]

Resellers

Imagine you are asked to buy some software from, say Adobe.

  1. You go to their web site,
  2. try to find the link to buy,
  3. figure out how to pay,
  4. get to the checkout page,
  5. then stop and search Google for “adobe coupon codes”,
  6. go back to step 1
  7. keep refreshing your email for the link,
  8. download the software.
  9. Keep of record of the receipt somewhere.

Now imagine you have to do this for 1000 different items, at 1000 different web sites. It gets to be a very large job. Some companies have outsourced their procurement to resellers.

A reseller is simply an intermediary who pays you and provides the software to their client. It’s also their job to ask for a discount, but there is no need to provide one. They have been told to acquire your product, and have already been paid a fee as a percentage of your price.

[Editor's Note: Never never never never give these guys a discount! Was that clear enough?  :-)

They might go down easy or they might use sleazy hard-sell tactics to get you to lower your price. Some will even say they have the power to block the sale. That's not true; they don't get their useless, stinky paws on the order until it's already approved.]

Keep smiling (in public)

Selling to big companies can be frustrating. Throughout the process, it is important to stay professional and pleasant. Sometimes, it may appear that your customer is trying to screw you. Even if they are, is your job to be jovial, point it out, and assume that it is a simple oversight. It makes no business sense to throw money away because of a rude email.

What else?

What other techniques do you have? More stories from the field? Leave a comment and join the conversation.

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  • Matt Redlon

    Interesting article. Any thoughts on the implications of cloud-based Software as a Service (SaaS) when contracting with large companies? Several customers are simply referencing it as a service (think BPO with Accenture or something) to avoid the complexities of legal/IT in that the traditional software acquisition processes they have in house don’t seem to fit. This is less than ideal for both parties of course. Imagine the dialog around source code escrow we recently had with a large prospect – here’s the code, good luck getting it up and running with it’s multi-tenant AWS architecture.

    • http://blog.asmartbear.com Jason

      For the escrow problem, that’s true of any software not just SaaS. Most mature products have a pretty hairy build/test/deploy system with external references and unspoken environments. Fortunately all you have to do is send a ZIP file to the escrow service.

      Agreed that actually billing as a “service” is incorrect. In fact the accountants for those companies probably don’t want to bill it incorrectly; they might be hung up on the “Service” part of SaaS. Maybe you need to call it “hosted” or “rented” so it’s clearer.

  • Stefanos Tses

    May I ask in what dollar range all these apply?

    What the amount of the sell can be for a Micro-ISV to go thru this?

    • http://blog.asmartbear.com Jason

      The dollar range depends on the company. Usually there’s a limit under which a person can run a charge on a credit card without asking permission or going through a purchase order process.

      At ITWatchDogs we sold IT equipment, and we learned that anything under $500 could typically skip the PO system.

      On the other hand, the local school district requires POs on any purchase over $20.

      Perhaps a good rule of thumb is that purchases over $1000 probably require a PO, under $50 probably don’t, but every company is different.

  • Peter

    For many years, a company I worked for sold software to hospitals; they fit the mold you discuss here. One angle we eventually worked with customers was we would agree on a price, then we would mark it up say 10% and use that price in the PO, but with a 10% discount / 30 day pay window. Most of the time we got the price increase; sometimes we got the on-time payment. We were happy either way.

    This can work if your actual client inside the company wants to buy, and knows that their purchasing department sucks (some hospitals pay net 180…). If you refactor your thinking so that the actual purchaser and you are on one side of the table, and the purchaser’s legal and payment groups are on the other, you can frequently figure out ways to make more money.

    • http://blog.asmartbear.com Jason

      That’s a great technique; thanks for sharing.

      Yes, early-payment discounts are common, and much easier to get/enforce than late-payment penalties. I wish I did that more. :-)

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  • http://www.skmurphy.com/ Sean Murphy

    Can you supply an example or two of a legal contract where there is a claim of copyright protection? I have never seen a legal contract protected by copyright. Most contracts use very similar language because–although it looks like English, it’s not–you want to use wording that already has settled definitions in case law.
    .-= Sean Murphy’s latest blog post: Focus On a Niche Increases Your Chances For Success =-.

    • http://blog.asmartbear.com Jason

      I agree with you, I just don’t want to claim one way or another. Most people I know start their legal docs by copying an existing one.

  • Alvin Tan

    “Never never never never give these guys a discount!”

    You got a quadruple negative right there. ;)

  • http://softwareprototyping.net John Clark

    This is really good stuff, but doesn’t answer the really crucial question (to me, at least) which is: “how to get onto the preferred supplier list”.

    Once you’re on there, potentially your company is ‘made’ (a bit mafioso, but there you are) but until that point it is incredibly hard to get any traction whatsoever – and believe me, I’ve tried: presentations, workshops, milking contacts, et cetera….

    So, any tips for getting on the all-hallowed preferred supplier lists of big corporates would be *VERY* useful indeed!
    .-= John Clark’s latest blog post: Who’s gonna do it? =-.

    • http://blog.asmartbear.com Jason

      If you mean just selling for the first time, that’s really the entire selling effort; if you mean you’ve already sold to them but there’s an additional “preferred” list, then I’ve never experienced such a thing.

  • http://spartez.com Wojciech

    Thanks Jason for yet another invaluable piece of advice.
    Your blog is just awesome for startups.
    I wish you had posted that a few days earlier, as I’ve just finished my first serious quotation/PO/payment terms cycle with a “more corporate” US-company :)
    Without your blog I needed to dig into wikipedia articles, IRS and financial portals to understand this process.

  • Michael

    We sell software and services to school districts, which in some cases is the same as selling to Fortune 500 companies. We will often provide the district with a template of our License Agreement while they are working on the PO. That way their lawyers can voice any objections earlier in the process. Have several departments work in parallel if at all possible; it cuts down on a VERY lengthy sales cycle.

  • http://improvingsoftware.com John Fuex

    Nice article Jason.

    It is painful to read that, especially with some first hand knowledge of how accurate a picture it paints. An interesting follow-up article might outline the often even more arduous task of selling to Government agencies….
    “Are you on the GSA Schedule?”

    That said, and as much as bureaucracy seems ridiculous, it is a necessary evil to run something as complex as a large company or agency. What strikes me as ridiculous is large companies that make you run these gauntlets to BUY from them.
    .-= John Fuex’s latest blog post: SQL Injection Prevention Fail =-.

  • Paul Lanza

    What about if the large company wants Most Favored Nations status?

    • http://blog.asmartbear.com Jason

      I always say: Anything for money.

  • http://blog.olegkokorin.com Oleg Kokorin

    We have a very related problem. There are often customers who insist on us having a professional liability insurance, like up to $1,000,000.

    This insurance isn’t cheap (in the range of $30,000+) and requires a lot of paperwork, like the insurance company will want to go through all our contacts and other things. So the direct and indirect costs of having such an insurance are very high for a small company. How to avoid this?
    .-= Oleg Kokorin’s latest blog post: Just released a YouTube video we are proud of =-.

    • http://blog.olegkokorin.com Oleg Kokorin

      I apologize for the wrong number – $30K was stuck in my memory, but it was for a really big comapny. Apparently, it costs in the range of $500-$1000 for a small company. Is that correct?
      .-= Oleg Kokorin’s latest blog post: Just released a YouTube video we are proud of =-.

  • http://www.studiodonatiforesti.it limbo

    selling to big companies is ugly, most times you have to deal with employees that are interested more in receiving presents from you for Xmas rather than evaluating properly your product/service. Small companies where u can deal directly with the owner ase much better

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  • http://www.Indelv.com Zachariah Labrode

    I like to add on this blog by adding that web standard are very important. Take a look at what is now happening between Adobe and Apple.

  • Alexandre

    About legal issues
    I know a small company which sold software to a very big one.
    The small company was leaded by a lawyer.
    The result: the big company had been tied to the small one (which eventually got big) for decades.
    The big one’s name is in 3 letters. You know the small one since you probably use it right now.

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