A volume commitment is a bet on your own forecast, and the supplier sets the odds.
Take a software contract with 10,000 seats. List price is $120 a seat a year. The supplier offers $96 a seat for a three-year commitment to all 10,000. That is 20% off. The buyer signs on the last day of the quarter and books the saving.
Then the seats fill slowly. Average use over the term is 7,200. The buyer still pays $960,000 a year. Divide that by the seats in use and each one costs $133.33. The 20% discount has become a price 11% above list.
We think a commitment is sold as a discount and settled as a bet. A category manager who has watched a $960,000 line sit at 72% usage in year two stops signing flat commitments.
Who forecasts the volume
In the meeting where the number is set, the requester says 10,000 because 8,000 feels risky. Procurement has no number to argue with. The only number on the table is the supplier's discount, so the discount wins.
The number in the contract comes from the business. The business asks for headroom, because running out of seats is a visible failure and owning too many is not. Nobody in that meeting is paid for being right about year three.
The supplier has watched many commitments play out and knows how often buyers land short. You have watched yours once or twice. We would ask for the utilization history of customers your size, and treat a refusal as information.
A flat commitment hides a second bet. It assumes your needs on the last day of year three match your needs today. Companies reorganize, sell divisions and change tools. The contract does not notice.
Find the break-even before you sign
Divide the discounted price by the list price. $96 over $120 is 80%. Below 8,000 seats in use, you would have done better paying list on demand. We would put that number on the first page of the deal file, next to the discount.
The same arithmetic runs through cloud contracts. AWS Savings Plans and Google Cloud committed use discounts both trade a lower rate for a one or three year commitment. You pay for the commitment whether you use it or not. Spend that grows into the commitment wins. Spend that stalls pays for capacity nobody touched.
Run the same test on a bad year. At 7,200 seats, the commitment costs $960,000 against $864,000 for the same seats at list on demand. That is $96,000 more a year, or $288,000 over three years. It is the price of the bet losing.
Check which one you have. If the forecast came from a sales plan that has missed twice, cut it by what the plan missed before you price the commitment.
The discount is the supplier paying you to hold the forecast risk. Ask whether it is paying enough.
Three edits that cost the supplier little
Ask for a ramp first. Commit to 6,000 seats in year one, 8,000 in year two and 10,000 in year three. If your forecast is right, the supplier still gets the full volume. If it is wrong, you have paid for fewer empty seats along the way.
Second, ask for a true-down at each anniversary. A 10% true-down on 10,000 seats lets you drop 1,000 seats a year without a negotiation. Third, ask for unused seats to roll into a credit against the next year, so a slow start does not become a permanent loss.
We would take a smaller commitment at a smaller discount over a full one the business cannot fill. Expect to get one of the three. Decide before the call which one you would trade the other two for.
What the supplier hears
A ramp costs the supplier near-term revenue. A true-down costs it certainty. A rollover costs it breakage, the money it counted on from seats nobody used. Each ask takes something from a number on the supplier's forecast. The rep knows which number.
So offer something on the other side. A longer term works. So does paying the annual fee up front, and we have argued that a day of payment terms has a price you can work out. A supplier who gets certainty on one line has more room to give flexibility on another. That trade is the real negotiation, and the discount percentage is only where it starts.
Another post makes the case that suppliers price what it costs you to leave. The logic applies here. If you could not leave anyway, the supplier is paying you a discount for a commitment you were already making. Push the discount, or skip the commitment.
Test usage in month nine
We would put a usage review in the calendar nine months into the term, three months before the first anniversary. If use runs under the break-even, you have time to ask for the true-down while the supplier still wants the next year.
Ask the supplier for its own usage report at the same time. Its count of seats and yours will often differ, and a gap of a few hundred seats is real money at $96 each. Settle the count before the anniversary, not after.
Found at month 35 of a 36 month term, the same gap is a sunk cost.
Pull the invoice and the usage report side by side. The gap between them is the number to bring to the call.
A commitment is part of what you paid
In Outcomes & Learning, Whispor keeps a record of every supplier, including positions, concessions and commitments, and it checks the invoices 45 days after every deal. We think a volume commitment belongs in that record with its break-even beside it, so the next renewal starts from what you used.
Give Whispor a renewal goal and the plan names the work that stays with your team. We would put the month-nine usage review there. A commitment nobody reviews is a bet nobody checks.
The Whispor team
Related: The rebate threshold is set where you almost get there. · Suppliers price your switching cost, not your spend. · Procurement negotiates payment terms without knowing what a day is worth.