How Big a Discount Should I Give For Multi-Year Deals?

Q: What are the typical discounts SaaS companies offer for a multi-year contract paid upfront for a 2, 3 & 5 year contract? (Five is a stretch.)

You need to back into what you are solving for:

  • Is your churn material? If it’s close to zero by logo, and negative based on cohort revenue (i.e. you have net negative churn), multi-year contracts are worth less.
  • Are your renewals a lot of work? Renewals do have hard and soft costs. If so, multi-year are much better. If renewals cost money, and if you pay commissions on renewal especially … it’s fast, easier and simpler to pay the next cost of that renewal commission up front in essence via a discount.
  • Are you getting the cash up-front? This is a big, big deal in the early days. Less so later, once you are cash-flow positive.
  • Can you lock out competitors? One advantage to 3+ year contracts is they discourage your customers from looking for other solutions, at least, for quite a long time.

The bottom line is most companies end up giving an additional 10–20% discount for multi-year contracts.

Once you go past 20% or so, you are giving up a material amount of downstream revenue in Years 2–10, if your churn rate is low. You’re locking yourself into a decade of discounts not just for the users you close today, but also the ones you add later.

Large discounts for multi-year deals may be worth it in the early days for the cash (it usually is). It may be worth it later if your churn is high.

But if you have net negative churn, bet on your app and yourself, vs. lock-ins. You’ll make more money, with less friction, in the long run.

A bit more on a related point here: Annual Contracts: Maybe Not All They Are Cracked Up To Be | SaaStr

Published on August 12, 2020

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