Dear SaaStr: What does it mean in enterprise software sales when a company offers to buy out a competitor’s contract? is this a common practice?
Offering to buy out a competitor’s contract means that your company is willing to cover the cost or overlap of a customer’s existing contract with a competitor to incentivize them to switch to your solution.
This could involve giving the customer free or discounted usage of your product for the remaining term of their current contract, effectively making the transition cost-neutral for them. It’s a way to eliminate the financial and psychological friction of switching vendors.
This is a fairly common practice in competitive markets, especially when you’re trying to displace an entrenched competitor with long-term contracts.
Zoom famously did this to beat WebEx in its early days. WebEx had locked customers into multi-year deals, so Zoom offered buy-out contracts to make the switch painless. They didn’t literally write checks to customers but instead provided free usage for the overlapping period of the competitor’s contract. This strategy helped Zoom win over customers who might have otherwise stayed put simply because they didn’t want to pay for two solutions at once or deal with the hassle of switching.
The key here is that buy-out deals reduce friction in the sales process. Customers don’t want to feel like they’re paying twice, and they don’t want to deal with the headache of switching unless there’s a clear, compelling reason.
Think about it from the customer’s perspective. If you can make the transition easy and financially neutral—or even advantageous—you’re much more likely to close the deal.
That said, this tactic isn’t for everyone. It can be expensive, and the ROI might not always justify the cost unless you’re targeting high-value customers or marquee accounts.
It’s most effective when you’re above $10M ARR and have the resources to absorb the cost, or when you’re in a hyper-competitive market where displacing competitors is critical to your growth strategy.
If you’re considering this, make sure you have clear guidelines for when and how to offer buy-out deals.
For example, you might only offer them for multi-year contracts or for customers in strategic verticals. Or a simple way to do them is to combine them with a new one-year contract. I.e., if they have 3 months left on a competitor and they sign with you for a year, they get 15 months for the price of 12 in the first year.
And don’t forget to align your sales team’s incentives—stealing a deal from a competitor often takes more effort, so you may need to pay higher commissions to motivate your team.
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