Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used NSM to Reduce Software Costs 15 Percent
Transcript
- Lucas: So there's this metric that venture capitalists obsess over, but I can count on one hand the number of procurement teams I've heard mention it. It's called Net Dollar Retention, or NDR. Luna: Right, the classic SaaS metric — how much revenue you keep from existing customers, factoring in upgrades, downgrades, and churn. Lucas: Exactly. And the reason VCs love it is that a high NDR means a company can grow without spending a dollar on new customer acquisition. But flip it around: if you're the buyer, a supplier with high NDR has you locked in. You're expanding your spend every year, often without realizing it. Luna: Which sets up today's episode. One procurement team used the lens of net retention — but from the buyer's side — to cut software costs by 15 percent across six contracts. Lucas: Yeah, and what I love about this case is that they didn't just demand a discount. They actually used data the supplier already had — usage data — to reshape the conversation. Let's set the scene. The company is a mid-size manufacturer, about 3,000 employees, running a typical stack: Salesforce, Microsoft 365, Workday, a few niche engineering tools. Their software budget was growing about 12 percent year-over-year, and the CFO wanted it flat. Luna: That's a tough ask when most SaaS contracts auto-escalate 5 to 10 percent annually. Lucas: So the procurement lead, let's call her Sarah, decided she needed a different framework. Instead of negotiating price per seat, she looked at net dollar retention from her own perspective. She asked: 'How much more are we spending on each supplier year over year, and why?' That question led to a three-phase approach: audit, renegotiate, monitor. Luna: Audit first. What did they find? Lucas: They pulled consumption data from each platform. In Salesforce, they had 400 licenses but only 280 active users. In Microsoft 365, they were paying for E5 licenses for everyone — turns out only the IT team needed the advanced security features. The rest could use E3. Across the six contracts, they found about 22 percent of licenses were underutilized or over-tiered. Luna: That's low-hanging fruit, but it's also the kind of thing suppliers know about and don't flag. Lucas: Exactly. Sarah told me that when she asked the Salesforce account manager for usage reports, he hesitated. He knew the data would show waste. But she had a contractual right to the data, and she used it. Luna: So phase two: renegotiate. How did she use that data? Lucas: She didn't go in with a hatchet. She said: 'Look, we want to stay with you, but we need to align our spend with actual usage. Here's what we're proposing: we'll consolidate to the number of licenses we actually use, and in exchange, we'll sign a three-year commitment with a 5 percent annual cap on price increases.' That cap was critical — it effectively locked in a lower NDR for the supplier. Luna: And the supplier went for it? Lucas: Interestingly, yes. For the supplier, a guaranteed three-year contract with predictable revenue was better than risking a mass downgrade or — worse — a competitive RFP. The sales rep got credit for a renewal, and the customer success team liked that usage would actually match the contract. So it wasn't adversarial. It was aligned. Luna: That's a key point. You're not squeezing margin, you're right-sizing scope. Lucas: Right. And the results: overall software spend dropped 15 percent, from about $4 million to $3.4 million annually. But the more interesting number was that the per-unit cost actually went up slightly on some products — because they moved to higher tiers where they needed them — but total cost went down because they eliminated waste. Luna: Let's talk about phase three: monitor. Because that's where most procurement initiatives fail. Lucas: Exactly. Sarah set up a quarterly review with each supplier where they would share updated usage data. She also added a clause that if utilization dropped below 80 percent for two consecutive quarters, the supplier had to offer a corrective action plan — either re-tier the licenses or offer credits. That holds both sides accountable. Luna: And that actually ties into something I've been thinking about. If these conversations have moved your work forward in some small way, it's worth saying that listener support is what keeps this show ad-free. We've had people ask how they can help, and the simplest way is at buy me a coffee dot com slash fexingo. No pressure — just putting it out there. Lucas: Yeah, and it genuinely makes a difference. So back to monitoring: Sarah's approach created a feedback loop. In the first year, she caught two contracts that were drifting back toward waste — one team had added 30 licenses without approval — and she triggered the corrective clause. That saved another $80,000. Luna: So the framework is: audit to find the delta between contracted and consumed, renegotiate to align spend with usage, and monitor to keep it that way. Lucas: Exactly. And the underlying insight is that net dollar retention isn't just a supplier metric. As a buyer, you should track your own 'net spend retention' — the year-over-year change in what you pay a supplier for the same scope. If it's consistently above inflation, you're probably leaving money on the table. Luna: One warning though: this approach works best for SaaS with granular usage data. For a raw material supplier, it's a different game. Lucas: True. But for any software or subscription-based procurement, it's a repeatable playbook. Sarah's team is now rolling it out to their next 20 contracts. They're targeting another 10 percent savings. Luna: So what's the one thing you'd want a listener to take away? Lucas: That the data to reduce spend already exists — it's just sitting in the supplier's dashboard. Ask for it. Contractually require it. Then use it to restructure the relationship, not just the price.