Vendor Management

  • 7 min read

4 Types of SaaS Vendor Lock-ins

Sethu Meenakshisundaram

19th October, 2023

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Some vendors purposely make it difficult for their users to transfer their data to a competitor's service. If they make it flexible for the users, it means they lose revenue streams. 

These vendors don't explicitly prevent users, but they impose technical, financial, and legal restrictions that make it hard for them to migrate.

What is SaaS Vendor Lock-in?

To put it simply, SaaS vendor lock-ins are restrictions that prevent users from switching from one service provider to another.

In an open IT environment, users can shift providers freely. They can easily transfer data from one vendor to another, even if it is a competing vendor. 

But the world of enterprise IT is not as fair and open as it should be. This is due to aggressive competition between vendors, regulatory restrictions, and proprietary technologies.

Some vendors purposely make it difficult for their users to transfer their data to a competitor's service. If they make it flexible for the users, it means they lose revenue streams. 

These vendors don't explicitly prevent users, but they impose technical, financial, and legal restrictions that make it hard for them to migrate.

On the other hand, when it comes to opting for their service, the process is seamless. 

The initial costs are low, but increases as the users need more service. Other technical limitations such as performance, security, integration, and compatibility issues with the competing vendors are only experienced later on. 

All the above limitations are either printed as obscure fine print details in their terms of service (ToS) or cannot be predicted as a user's technical requirements evolve.

Issues That Arise Due to Cloud Vendor Lock-ins

1. Extra Cost

Vendors charge high licensing costs for low-value add-on features that should be included in the plan. Though these cloud vendors heavily rely on standardization, they play these tricks to drive additional revenue. 

For example, two years ago, Adobe increased the price of its CC suite subscriptions for single and all apps. 

For a single app, the price was increased from $19.99 to $20.99.  Creative Cloud for individuals All Apps plan was increased from $49.99 to $52.99.

Creative Cloud for teams All Apps plan was increased from $69.99/month to $79.99. However, those who had paid annually had the privilege to continue the old pricing until the term got over. Many Twitterati raised their voices against the price hike. 

2. Loss of Flexibility

Vendors lock you in a contract by making it compulsory to use their repertory cloud environment to run their applications. If you wish to shift, you would be required to pay a high sum.

3. A Unilateral Change in Terms-of-Agreement by Vendors

Most of these vendors send you a website copy to sign an agreement. This makes it easy for them to unilaterally alter the terms and conditions by changing the website copy. 

4. Not Able to Adapt to (Changing) Needs

The worst kind of vendor lock-in is when your requirements change as your company grows, but your current vendor has limitations and is not able to fulfill your new requirements.

Imagine, you have subscribed to the HubSpot Starter plan for your marketing team in the beginning. But since your email list has grown, to get more revenue from email marketing, you need the ‘Marketing Automation’ feature. 

But HubSpot requires you to switch to their “Professional Plan’ to use marketing automation which will cost you $755 extra per month. 

In this case, either you need to spend that extra amount or switch to a different vendor.

4 Types of SaaS Vendor Lock-ins

1. Pricing Lock-ins That Ransoms You

Causes

• Costly Implementations. At the time of procuring a new SaaS, many vendors charge a one-time set-up fee, also called an implementation fee. This setup fee is usually incredibly pricey. 
  
  So, if you find yourself wanting to change your cloud service provider for any reason, you might go against changing the provider because of the high implementation cost you paid to your current vendor. 

• Non-adherence to usage-based pricing. Usage-based pricing means you pay based on how much you consume. This is the best practice that needs to be followed by cloud vendors. 
  
  But unfortunately, to make you pay for even the unused and underutilized apps, most of the vendors don’t adhere to this practice. They charge you monthly regardless of whether you use their service or not.
  
  So if your SaaS stack has costly redundancies and under-utilized applications that are out of your notice, you would be wasting extra dollars for nothing.

Solution

The first step is to look for vendors who offer fast, cost-friendly (or free,) and effective implementations. Choose vendors who offer a ‘ready to go’ cloud service. With less implementation time, you can get an increased time to value. 

An efficient software usage monitoring app will analyze your usage and help you reduce the expenses due to unused and underutilized apps.

Our SaaS management solution, Zluri, offers you clear visibility and insights into all the SaaS apps present in your network and helps you make informed decisions about renewals, helping you to reduce your IT costs. 

This can easily be done by looking at the usage metrics of all the applications present in your software library.

2. Lock-ins That Keep Your Data as Hostage 

Causes

• Loss of access to your data. A situation where the vendor holds your data as a hostage and threatens to destroy it is another kind of lock-in. This usually happens when you haven't paid your monthly fare, did a late renewal, or are shifting to a competitor's solution. 

• Loss of insights. Sometimes vendors give you a dump of your data in a CSV file when you ask to take your data when changing services. 
  
  Though CSV can retrieve your data quickly, it doesn't carry the context of the data. In some industries like Healthcare and Fintech, you need to preserve the context for auditing. 
  
  For example, hospitals need to preserve patients’ electronic medical records (EMR) for up to 7 years. EMRs may contain the clients’ signature which is not possible to transfer in the CSV format.

• Data migration. While retrieving your data from these vendors, you need to make sure they provide you the same in a compatible format that could be read by your new SaaS application, or else it's a waste. 
  
  These vendors charge you heavily for retrieving your data as this is the chance for them to burn your pockets intensely since you are shifting to a new cloud service.  
  
  These vendors increase the switching costs on purpose, making your stay. They have understood the logic that higher costs for switching from one software would make you less inclined to move away from them. 
  
  There are cases where the data processing is so complicated that you need technical expertise to understand the whole process. 

Solution

If your data is stored in an RDBMS (Relational Database Management System) format, you should ask your vendor for the image of the database to make your transfer data lossless. 

Although you share important data on your SaaS applications, it is vital to have a backup of all your data.

You need to select cloud vendors who make your data migration process simple and easy. 

Also, you need to be firm about your data format with vendors. Fight for your data.

3. Flexibility: Locks-ins that Handcuffs You

Causes

• Not having the flexibility to decide external or internal databases. The more you are inclined towards their SaaS stack, the more you are locked in. Most SaaS vendors won't give the option to run their applications on Amazon AWS, Microsoft Azure, or Google Cloud Platform unless you pay two times more money. They make it mandatory to use their environment.

• The contract contains URLs to the vendor's website. Cloud providers make you sign an agreement where they have the right to unilaterally change the terms and conditions by simply changing the copy on a webpage. 
  
  Some cloud providers do this as they don't own all the pieces of their solution. Third-party solutions that they embed into a solution are often sold via a link within the vendor's paper. Except in such situations, you shouldn't accept a web link in a contract. 
  
  The initial agreement might state in the terms of service that they won’t use your data. But these vendors can change it later to monetize your data by selling it to third-party advertisers.

• Charge extra for AI/ML-based features. Today, artificial intelligence has the power to optimize business processes, help increase productivity, and make your work efficient by automating repetitive tasks. Vendors often take advantage of this by charging you separately for features built on these capabilities.

Solution

You should give preference to vendors who give you the option to host the application over the ones who force you to use their platform. 

As you can't change the contract deal without your vendors' consent, the reverse should also hold true. You must make sure that everything is static in the contract and there are no web links (or any other dynamic elements) that point to the vendor website, which can be updated any time by the vendor. 

You must ask the AI, automation, and any other intelligence functionality to be given in the core software, not packaged and charged as an add-on.

4. Renewal Which Gives You a Lower Hand in Negotiation 

Causes

• Vendors wait until the last moment to negotiate a renewal. When it comes to renewals, the vendor’s sales team makes you wait till the last moment to negotiate a renewal. 
  
  So you don’t have enough time to shift to another vendor.  Most of the price increase happens from the vendors’ end during this short period. You are left with no alternative than holding on to them.

• Price protection on renewal for a limited period. This is purposefully done to increase the pricing after the initial term expires. Some vendors’ terms force you to implement an expensive, evergoing, potentially challenging service that may make you go bankrupt. 
  
  Their agreement terms don’t allow you to switch to another provider as there are many switching costs that force you to reconsider your decision to change.

• Different renewal dates for different apps (from the same vendor). If you have acquired additional services from the same vendor, but each of these products has different renewal dates, then you have locked yourself.
  
  The vendor makes sure you don’t switch to some other service as you already have ongoing renewals of their other products. Also, because of this, you don’t have the purchasing power to negotiate for a better term and pricing.

Solution

Start negotiating at least 12 months in advance before the current service is about to expire. This way, you get the best negotiation alternatives to the agreement or switch to a different solution and have a lot of time implementing it. You can collect your usage data and use it for negotiations.

Zluri provides usage data for all your SaaS applications and helps in procurement and renewals. You can check the compliance status of the apps. Zluri gives you the power to eliminate your SaaS waste. It also helps you with vendor management by alerting you on renewals and assisting you to get a fair price based on usage data.

You must ask vendors to be completely transparent about the amount they would increase or at least fix a cap on the increase after the price protection expires. 

If you are using many apps from a single vendor, get the renewal date of all the apps on the same date so that you can negotiate collectively for all the apps. A larger deal value will give you better terms and discounts. 

To make your renewal dates fall on the same date, don’t renew for yearly terms. For smaller renewals, just renew for the term when you will renew your next app from them.

Zluri, helps you automate your renewal process and stay away from vendor lock-ins. We also help in negotiation. You can sign up for a demo to understand how we can help you lower the cost of your apps.

Keep Track of All Your SaaS Vendors to Win Over Them

When you have hundreds of apps, it’s difficult to be on top of every renewal. A system of record can help you keep track of all your SaaS vendors. A SaaS management system, automatically creates the database off all your apps vendors. 

Zluri takes just 5 minutes to go live. It helps you plan and manage vendors' lifecycle from procurement to exit strategy in a safe and secured manner, keeping your system updated.

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About the author

Sethu Meenakshisundaram

Sethu is the Co-founder of Zluri. He believes SaaS and APIs will help everyone become a builder. He frequently writes on SaaS management and workplace automation. Before Zluri, he was part of the founding team at KNOLSKAPE, one of the leading corporate learning gamification startups that he helped scale across 30 countries. Other than technology, Sethu is passionate about quizzing, board games, and photography. His retirement plan is to operate a board game bistro in one of the touristy spots of Southeast Asia.