A Guide to Contract Negotiation
Who benefits from multi-year subscription deals? The short answer is everyone. Since that is the case, why is there such resistance on the part of many customers and SaaS providers?
From the customer’s perspective, a multi-year agreement provides price predictability to the extent that unit price is frozen during the contract term. A multi-year agreement mitigates customers’ single biggest concern expressed during contract negotiations: “What happens to my price at renewal?”
While customers expect a price increase at renewal (the product is continuing to improve and is, therefore, worth more over time), they are concerned about percentage increase. With switching costs often quite high, t
he customers realize that the SaaS company has leverage to radically increase prices; however, that fear is often overblown as market competition keeps the SaaS company in check (customers always have a choice).
From the SaaS company’s perspective, multi-year agreements are a double edged sword: on one hand, multi-year agreements ensure a steady and predictable revenue stream; on the other hand, they also limit the opportunity to increase the unit price each year.
From my perspective, the balance of benefit swings toward multi-year agreements (with a price increase cap in the contract). After all, from the SaaS company’s standpoint, the value of guaranteed annual revenue outweighs the opportunity to increase prices every year. A side benefit of multi-year agreements is that reductions of users/revenue are not allowed during the contract term, thus further protecting the revenue stream.
From the customer’s perspective, an annual agreement provides flexibility to reduce user counts (or cancel the contract entirely) annually, but is subject to annual price increases. Therefore, any customer that enters into a one year agreement is unsure about the longer term viability of the product to meet their needs and is willing to trade annual price increases for the ability to attrit at the end of any given year.
Ultimately, unsure customers often start with a one year agreement then renew for 3-5 years, once the project is warrants a longer commitment. Regardless, there is lots to consider in this area and it affects contract negotiation.
If your SaaS company wants extra guidance on contract negotiation, please either ask Virtual Dave or email dave@moicpartners.com.
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