What is a SaaS company cancellation policy on yearly contracts?

The simple answer “of course” in that yearly contracts can’t be cancelled — per se. That’s the whole point of whatever explicit or implicit discount you give for doing a yearly contract (vs. monthly or quarterly). And the language likely will plainly say the contract cannot be cancelled.

But … it’s just one contract. So a few qualifiers:

  • If you haven’t received pre-paid cash, it doesn’t matter. Do NOT threaten to send the customer into collections – period. There is no effective way to enforce a customer contract if the customer doesn’t want to pay and doesn’t need the service any longer. Do not create drama. This won’t work, and it will turn someone who just might be a customer again into someone that won’t be a customer again. Any “annual” contract in fact at a practical level is only as long as the pre-paid cash attached to it.
  • They may come back. Why are they cancelling? Think long. They may come back, or at least, refer a colleague or friend to your app. Make the exit process as positive as the entrance process. Thank them for being a customer, for however long. For taking a chance on you.
  • Move on. Issues like trying to get out of an annual contract can get the whole team’s dander up. But if it’s 0.5% of your ARR, it just doesn’t matter. Move on.
  • It’s your fault. Remember, any customer that cancels is because you didn’t deliver enough value. If you did, they’d still be a customer. It’s not their fault. It’s not us-vs-them.
  • But — there’s no need to refund any cash, 95%+ of the time. Some customers may want their money back, if they cancel say 6 months into a 12 month contract. Usually, a polite Sorry But Per Terms of Contract You Prepaid for a Discount is enough unless you truly did not deliver the service promised. If you didn’t — return the pro-rated cash.

Until you are large enough that cash doesn’t matter, annual and multi-year contracts really only matter if they are cash up-front contracts. If you don’t have the cash, and they want out, they get out. One way or another. So you might as well leave on good terms.

And let the team solve bigger and better problems than this one.

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Published on May 20, 2018

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