[alephnerd]

This is basically a polite way to fire a customer.

You don't want to sell to everyone - you need to make sure the cost of retention+support is significantly less than what they are paying.

If a customer is too troublesome or spending too little (for a company like VMWare, a $8m contract is on the smaller end) this is the politest way to fire them.

It sounds like this customer is a legal firm, which makes sense - they tend to have a much smaller IT footprint.

Every dollar isn't the same.

Edit: to elaborate - it's all about margins. Is that $8m worth it if in aggregate you spending an equal amount of time on that account as you are on a $20-30m account? It ain't

[wjnc]

It is the most shitty (and stupid) way possible to act though. Old price x 12 is not in good faith. Contracts are based on good faith. Give them a rationale, give them a deadline 24 months hence and a fair price increase. Dare to say no to individual customers. Any customer should now start planning for the end of their Broadcom VMWare-contract. If they do not act in good faith to a random customer, why would they to you? Large company contract management is based on trust. This might cost Broadcom a lot more than a few individual customers that they were planning on 'letting go'.

I work at a company that got sold by another company with an indefinite LTA (long term agreement) in place. Former owner did not honor the LTA, but at least was transparant and timely about it. We got two years to sever several key processes. We will end up severing all ties, since the business risk of leaving open ends without the LTA is too big for my risk appetite. Fool me once. And that's our business consequence of not honoring an LTA even when the former owner severed the ties in good faith. If the buy-in is not there for both parties to the contract, then there is no ongoing relationship.

[lordnacho]

What's not good faith about this? "Your custom won't work for us unless we get 100M"

Chances are this is not actually surprising for this customer. There's probably been a lot of talk between the sides, a lot of expectations that weren't met both ways.

What you're describing at your own company seems to be that same thing, no? Relationship wasn't going well, and it's gotta end somehow.

Now that's not to say this should be normalized, it shouldn't. But there needs to be some way to say "hmm, it doesn't make sense for us, business wise"

[alephnerd]

^^^^^ exactly this!

[red-iron-pine]

> Give them a rationale, give them a deadline 24 months hence and a fair price increase

consider that, for shitty, demanding customers, the 'fair price' may be 12x more.

$8M probably doesn't justify the effort, and they may well use $10M+ in support, resources, or potential liability.

Good faith in the contract is expecting to give something in the contract and then meaning it. They will give good support -- for 100M.

[alephnerd]

This is how I know you haven't been on an enterprise account team.

The strategy you described has no upside for the vendor (in this case Broadcom VMWare).

[michaelt]

> The strategy you described has no upside for the vendor (in this case Broadcom VMWare).

The upside is you don't scare off other customers when they hear reports of a 12x price increase.

Right now, in response to this post, VMWare's biggest customers will be drawing up plans for if they need to walk away at the next contract renewal. And they'll want those plans to be extremely credible - it's worth spending $5 million trialling and integrating a competing system, if it stops your $50m contract turning into a $150m contract.

[mamonster]

I mean, VMWare customers were warned about this ever since the deal got announced. This is literally the Broadcom strategy for the last decade at least: Buy vendor with lockin, cut non-core features, raise prices and squeeze the customers who are in too deep.

Broadcom goes into these deals knowing it will hemorrhage a lot of customers and they don't care, they know they can make it up on those who are forced to stay. They don't care about reputation at all.

[michaelt]

Customers were all expecting to get milked, sure. But the milking process usually tries not to kill the cow.

Usually that means prices increasing by ~10% every year, so that it's never quite worth it to switch to an alternative system.

[mamonster]

Sounds like customers were not familiar with how Mr Tan plays ball, he's been doing this forever. He isn't trying to kill the cow, he will famish the cow to the point where the cow will be alive enough for him to milk his required rate of return and not an ounce more. Its a risky strategy, but Tan is loved by Mr Market so he gets the benefit of the doubt.

[InsomniacL]

"The Answer is simple: No" Broadcom CEO Hock Tan - Nov 2022 - addressing reports of vmware price rises

"[Broadcom's methodology] was not based on taking existing products and raising their prices" Broadcom CEO Hock Tan Oct 26th 2022

[red-iron-pine]

VMwares biggest customers will be getting deals apropriate to their offerings.

It sounds like this was a (comparatively) PITA small-fry legal / law office.

[Sebb767]

> VMwares biggest customers will be getting deals apropriate to their offerings.

Maybe I'm completely out-of-touch, but an 8M$ contract should be sufficient to get "appropriate deals"?

[alephnerd]

Companies like Walmart, Centurylink, AWS (via Equinix), and the DoD (via General Dynamics) use VMWare and most likely have contracts in the 9 figure range for a backbone service like VMWare

[alephnerd]

As I said in my comment - you can safely assume mean contract value is in the mid 8 or low 9 digits at a company the size of VMWare.

If this scares away customers spending less than that, good for them. It doesn't make a dent when a F1000 is spending tens of millions a year on VMware and purchase by committee and will get sweetheart deals by being strategic accounts.

[itsdrewmiller]

VMWare has 400k customers and 13.4b revenue according to google, which means their average customer is around 335k.

[alephnerd]

That's not how the average should be calculated.

It should be:

(Contract_1_yearly+...+Contract_n_yearly)/num_contracts

Anyhow the customer signed the deal (https://twitter.com/cioontherun/status/1761882689886433742), implying they were underpaying and had the capacity to pay the true rate.

[mschuster91]

> The strategy you described has no upside for the vendor (in this case Broadcom VMWare).

It has. Product/brand trust matters... the most obvious example being Google, who have had an extremely hard time getting their stuff to be actually used as they have shown time and time again that even if you're the biggest game publishers on this rock, you won't be able to rely on Google keeping up their end of any deal.

[alephnerd]

> Product/brand trust matters

At Enterprise SaaS level it does not.

You do not have an individual purchaser - the deal will be vetted by committee for 1-3 quarters.

> most obvious example being Google, who have had an extremely hard time getting their stuff to be actually used

Extremely hard disagree. GCP does well in enterprise/strategic accounts where a customer in some way competes with Amazon (which is around 20-30% of the F1000) and also doesn't have a significant Windows presence (minimizing the need for Azure+MS Support)

[lynx23]

Wait, IANAL, but... If contracts were based on good faith, why do you actually need contracts? I highly doubt what you wrote. To put too much trust/faith in a bussiness partner seems like a good way to kill your bussiness.

[ThunderSizzle]

Negotiations should be based on good faith from both parties. If a party attempts to negotiate in bad faith, it becomes very clear and ruins the relationship.

And people enter into unfair contracts regularly without realizing it or understanding it.

[alephnerd]

This seems to be a renegotiation occuring at renewal time.

[siod]

There is nothing polite about this, it's predatory behaviour. If you can't make a 8m saas contract work your then company is broken.

[jsmith99]

Is $8m small for a VMware contract? Surely if you’re big enough at some point it becomes cheaper to put something together in house - surely this point is far before spending $100m a year?

[alephnerd]

> Is $8m small for a VMware contract

Absolutely.

For an Enterprise SaaS generate $13.5B in revenue in FY23, you can realistically assume mean deal size is mid-upper 8 or low 9 figures.

Everyone and I mean everyone is using them

[nunez]

its kind of like AWS. with them, some customers are spending $20M+/month, while others (me) spend close to zero.

[alephnerd]

Pretty much, though AWS doesn't use direct sales to bring in lower revenue tier customers whereas VMWare did.

[nunez]

How do you mean? Signing up on aws.amazon.com and providing your card is a direct sale.

[alephnerd]

Direct Sales means there is personnel (inbound or outbound) selling directly to the customer on behalf of the Vendor.

If you sign up to AWS on your own credit card, there was no inbound or outbound sales motion at all.

AWS's self service motion is extremely efficient for lower tier customers (as the upside is basically infinite as you basically spend $0 to generate N dollars). <- This is also why YC's Request for Startups is mentioning Open Core startups, as the open source offering acts as a loss leader (eg. Kong, Hashicorp, Pulumi eventually)

Traditionally, companies like VMWare didn't support such a model and your only way to purchase was to jump on a call with their account team, but companies are transitioning to that to target low tier sales.

[shrubble]

This strategy works... until it doesn't. You may well be correct for the next 3-5 years; but after that those customers will leave and they won't come back. Ever.

Tech is littered with the twittering ghosts of companies that had something "essential" and "irreplaceable". The strategy is "a retreat to the high end" and a self-serving re-definition of "who are customers are" and "what we do".

[solarkraft]

Yes. Mind share is important. Does VMWare have the best product or are they so popular because "that's what I know"?

As smaller shops switch away (the Proxmox folks must be in a pretty good mood), the job market will be full of people who know the alternatives, but not VMWare products. And when "the real thing" is so incredibly expensive, why not switch to something comparable that your people already know?

[alephnerd]

An enterprise would switch to Citrix or Nutanix before Proxmox, as having on-call support is critical at that level

[biorach]

$8m doesn't cover retention (what retention?) and support? Not sure that makes sense.

[alephnerd]

Absolutely.

When you reach VMWare size ($13.5 BILLION in revenue in FY 23), $8M is chump change.

The margins on support might not make sense.

With the level of revenue VMWare had, it's realistic to assume mean deal size is in the 8-9 digit range.

> what retention

TAMs, CSMs, constant PFRs, constant escalations, etc

[Ekaros]

13,5 billion is 1687 8 million customers... That is not actually that many...

[rootlocus]

That's what I don't get either. If they can shove off one of their top 1500 customers (probably much higher) and, as someone put it, "everyone is using them", that means unless you're one of the top few hundred customers, this can absolutely happen to you. Which is what people are upset about.

[alephnerd]

It's how companies work.

I can guarantee for a fact that a F1000 will be spending 8-9 figures for a VMWare type product (I've worked on similar products as a PM).

$8m is low.

> Which is what people are upset about

All that matters is purchasing committees are ok (not happy, not sad - just meh).

All I see here is just IC engineers pouting.

[ehvatum]

> All that matters is purchasing committees are ok

Large enterprise purchasing committees are foremost concerned with risk, you absolute dolt.

The risk that price will jump 12x, requiring all kinds of scrambling, is fucking awful.

I don’t know what planet you’re from, but you gotta stop acting like it’s this one.

[sys_64738]

Enterprise is about focusing on the top earning accounts. This clearly isn't one of them.

[tgv]

And 100M is only 135 customers...

[biorach]

> The margins on support might not make sense.

Yeah, maybe. Without some real figures this is very speculative

> TAMs, CSMs, constant PFRs, constant escalations, etc

You seem to be assuming the customer takes up man-weeks or months of support and legal, not particularly typical for a repeat customer in that game - not sure how else you could account for the margin on $8m being completely eaten up

So... speculative and unconvincing

[alephnerd]

This is my bread and butter.

These kinds of numbers are closely guarded for competitive reasons.

Go chat with the sales or account teams at your employer - they can confirm in broad strokes what I've mentioned.

[biorach]

I think the strokes are a bit too broad for meaningful conversation

[alephnerd]

It's Sales and Pricing - there isn't a predefined curriculum around this.

Most of this is tribal knowledge you learn working a Field facing job.

Like I've said before, talk to SEs, AEs, and TAMs at your employer. They can confirm similar strategies and numbers.

[Rastonbury]

I work in enterprise saas as well and I can't imagine how bad this customer must be that they can break pricing unless VMware runs really low margins vs the industry. There must be other things as well

8m is 0.6% of their revenue, and they grew in revenue 4% from 2022 to 2023[1]. Losing 0.5% kinda hurts when they are growing that slowly. That 8m can't be that easily magicked out of existing customers or the freed up resources supporting that customer they fired. I know nothing about their business or financials however

[1]https://finance.yahoo.com/news/vmware-reports-fourth-quarter...

[alephnerd]

> There must be other things as well

My hunch is an Account Team gave a heavily discounted deal to land an upper market customer in order to meet quarterly commitments or get a nice commission.

The customer ended up accepting the $100M price-point as well (https://twitter.com/cioontherun/status/1761882689886433742), so they were clearly mis-tiered. If you can afford (what I assume is) a multi-year contract with a 9 figure TCV, you are generating 9 or 10 figures in revenue.

I've heard of similar shenanigans down the grapevine at w/ Cisco and Dell EMC and absolutely wouldn't be surprised if a similar thing happened at VMWare.

[Rastonbury]

If they accepted the 100m renewal then all is good for them, seems like a load of speculation about nothing - they were just simply overly discounted

[jraph]

I don't understand.

I can understand VMWare doesn't want to keep doing this, but with $8M, assuming a 100k annual salary, you can dedicate 80 full time employees to this customer yearly.

I understand 8M is nothing next to 13.5B, but that can't be unprofitable, can it? Or the contract is too low.

[baq]

taxes, margins, capex, etc. means you could do maybe 10. offshored to somewhere with competent people, 20-40 depending on location.

[alephnerd]

There are several flaws with your assumptions

1. "assuming a 100k annual salary" - the cost of salary is 1.75x stated wage, so in reality it's $175k

2. "you can dedicate 80 full time employees to this customer yearly" - you mean you need almost a hundred bodies per customers?!? In fact, this is a major reason to fire a customer. It means they are demanding and trying to outsource their entire org to you. Either pay up or piss off.

> that can't be unprofitable, can it

Nope.

> Or the contract is too low.

Exactly.

[jraph]

> 1. "assuming a 100k annual salary" - the cost of salary is 1.75x stated wage, so in reality it's $175k

I know, this was ballpark thinking, it's not a fundamental flaw in my thinking. 100k with taxes is still a 60k salary and that's about what I was thinking. Not great everywhere, but still good in many locations. I also don't know how much support people are usually paid, and 200k is still 40 people.

Now, indeed, I wasn't imagining hundreds of people per customer required. I'm willing to believe it's realistic for some kinds of businesses, for very big customers.

[everforward]

60k is likely very low for this kind of support. The people calling in are generally IT professionals that have issues a script won't solve.

When I worked with VMWare, it also wasn't uncommon for us to have support on site. If we were doing a big migration or had a significant issue, they'd send someone out for a week+.

They likely paid a premium to have support willing to travel for significant spans of time, plus now they're paying for hotels, daily stipends, etc.

Then you need labs for engineers to try to replicate problems, office space, general overhead like taxes and payroll providers, etc.

Then there's costs to the platform itself from some customers. E.g. small customers tend to be less homogenous. Every Fortune 500 has a SAN, many small companies don't. Now you need an "integrates with EMC" storage option for big companies, and an "integrates with everything else" option for small companies. Big companies want a service mesh, small companies want a billion different networking configurations, etc.

Basically big companies tend to resemble each other and view their differences as a competitive advantage they will pay their vendors to support so they can keep. Small customers diverge a lot, don't want to and/or can't afford to pay for the changes they need, and are generally more price-sensitive due to their ability and ability to switch vendors.

So simultaneously the small clients are profitable, but at a lower margin than bigger customers, and more willing to migrate away. Rather than taking a risk that they can do enough development to keep the small customers, they'd rather double down on the customers that can't switch, raise their margins, and cut their risk.

[alephnerd]

And $8m is LOW.

F1000s will spend the same amount on AV or endpoints alone.

For backbone infra, you can expect a price that is 4-6x higher, as network security, IT infra, etc is bundled.

[brazzy]

> With the level of revenue VMWare had, it's realistic to assume mean deal size is in the 8-9 digit range.

8 million is quite close to the low end of 8 digits. And at the high end of 8 digits, your assumption woud already mean they have only a few hundred customers in total, which is about as far from "realistic" as can be.

[alephnerd]

> only a few hundred customers in total, which is about as far from "realistic" as can be

That tends to be good enough for a PL within a larger organization, which VMWare is now.

Zscaler uses the same strategy and PANW is transitioning to as well.

[bachmeier]

Do you have information not in the link? I don't see anything related to your comment.

> This is basically a polite way to fire a customer.

I'll throw out that raising the price like this is also a strategy to increase profit. In the absence of a source for your claim, I'll go with that instead.

> Is that $8m worth it if in aggregate you spending an equal amount of time on that account as you are on a $20-30m account?

If that's how these decisions are made, the person making them needs to be fired, and fast. They should have considered that they could handle both accounts. Increasing the number of customers is called expansion.

[alephnerd]

> Do you have information not in the link

I do this for a living, first as a PM and now as a VC. These multiples are fairly common knowledge for anyone in Enterprise SaaS, and have have worked with accounts teams that have done this and have recommended similar strategies (at a smaller scale) to portfolio companies.

> the person making them needs to be fired, and fast. They should have considered that they could handle both accounts. Increasing the number of customers is called expansion.

I can expand the # of customers by selling 1,000 $1 contracts - that doesn't materially impact my company's financials.

You want to increase your (Revenue-COGS).

If you need to drop a needy customer to increase COGS because you have mistiered accounts caused by an account team targeting a hefty quarterly bonus (happens everywhere, and caused a big shitshow at a major cybersecurity startup recently that brought a federal investigation) so be it.

[bachmeier]

> I do this for a living, first as a PM and now as a VC. These multiples are fairly common knowledge for anyone in Enterprise SaaS, and have have worked with accounts teams that have done this and have recommended similar strategies (at a smaller scale) to portfolio companies.

So the answer is no, you don't have any information not found in the link, and everything you wrote was speculation.

> You want to increase your (Revenue-COGS).

Exactly, and without knowing anything about the financials of this deal, there's no way to know if your claims are correct. It might have been an attempt to take advantage of someone that built on their product, expecting that they'll pay more.

[alephnerd]

I've worked on these kinds of accounts at a VMWare sized company before.

If you don't trust me, go chat with CROs, Product Leadership, or Execs are similarly sized companies.

I agree this is tribal knowledge, but that's how most pricing and renewal negotiatons occur, with maybe a bit of RevOps black magic to justify a decision one way or the other.

[miki123211]

> caused a big shitshow at a major cybersecurity startup recently that brought a federal investigation

Care to elaborate?

[alephnerd]

I can't exactly. The Enterprise SaaS industry is very small. Ask around over drinks during a cyber trade show like RSA or Blackhat.

I can say this is a company where the CRO "left".

[nisegami]

>Is that $8m worth it if in aggregate you spending an equal amount of time on that account as you are on a $20-30m account?

I think it depends? Let's assume that both accounts are profitable overall, but one is massively more profitable. The logic to cut off the $8m account makes sense if you can move those resources towards more $20m accounts. But that isn't something that is necessarily possible, is it? There's only so many of those $20m customers out there.

This obviously changes if the $8m customer is not profitable or is just _that_ unpleasant to work with.

[alephnerd]

> But that isn't something that is necessarily possible, is it

At VMware size it absolutely is.

I've worked on accounts at similarly sized vendors and even AV or Endpoint spend will be in the $1-5M range alone even if per unit price is in the $20-30 range.

With a backbone product like VMware, you can safely assume spend is 4-6x as you will be bundling network security along with IT infra.

[AshamedCaptain]

I have seen companies that would refuse to serve customers that had not been growing as expected. Literally. Bogles my mind.

[alephnerd]

Why? Margins matter, not just dollars alone.

If you spend 75 cents to earn a dollar on one customer and can spend 25 cents to earn a dollar on another customer, you'd be dumb not to take customer 2.

[badcppdev]

It's a SAAS product why not take both customers. Don't leave breadcrumbs to feed your competitors.

It seems nobody can believe your assertion that a company would deliberately fire a profitable customer by quoting an x12 contract increase. There's no point asking me to talk to people in my business. You're going to have to point to publicly accessible resources.

[mamonster]

Tl; dr thing you should keep in mind(and this will happen to every SaaS): 1.5 mio in revenue per employee.

Your SaaS vendor will hike prices or fire people until they get to this number. Why ? Because VC/Wall Street told them that if they want a Meta/Apple/Microsoft like valuation or a good upround they need to hit this key metric.

Over the next 2-3 years every SaaS that is priced by some sort of market(so not passion projects/ projects run by guys who don't look at comparables) will at least try to hit the above metric. Whether that is massively laying off people(ring any bells?) or massively hiking pricing depends on the product in consideration.

The era of "profitable customer" is over. Now it's all about how profitable he is, and 1.5 mio in revenue per employee is the benchmark.

[alephnerd]

While i agree in broad strokes, this isn't exactly related to upping revenue per employee.

This sounds like a mis-tiering of an upper market or strategic account by an account team.

That said, Margins and RPE are critical now.

A lot of this is also because there are too many damn SaaSes now, and enterprise products bill monthly now as well.

In 2013 the average was 8 SaaS products per company and in 2023 around 80 (I can't remember the blog link I got this from but it was a fellow VC or CRO who pointed this out).

There isn't as much money floating around anymore as everyone is at their limit, and it's getting ridiculous to spend a couple hundred thousand on some random SaaS that's unneccesary.

[mamonster]

I think in this particular case you are probably right(you see much more experienced in actual enterprise sales), but I think my more general point is that these sorts of price hikes are what is priced into this business now.

VMware was bought at about 400k rev/employee, Broadcom was running at about 1.7mio per prior to that. Tan is essentially running a PE buyout shop that is listed, and he uses a lot of leverage. He might not get it to 1.5 mio but he wouldn't have bought it if he thought it could churn out anything less than like 1.2(over 6-7 years).

[sys_64738]

They're not volume providers so much as focused on the top revenue generating accounts. This is targeted and specific to remove the low revenue accounts from the business. It's a normal tactic.