Q: Dear SaaStr: Can We Add Termination Charges for SaaS services?
Some older companies do this. In fact, we were recently handed a bill like this for a 20+ year old SaaS product bought out by a PE firm.
And really, an “auto-renew for another year without notice” clause can basically do the same thing. Threatening a customer that forgets about an auto-renew and has already stopped using you is sort of the same thing.
You’ll be tempted to do a lot of things in the early days, especially. You’ll put so much work into a customer, and then for some reason — often champion change — they just go “poof” and disappear. You’ll be mad! You’ll want them to pay yo back for all the hard work you put into them.
The thing is, unless (i) you are in slow growth mode, (ii) don’t care about NPS/customer happiness, and (iii) are not focused on long-term renewals … it’s not worth it:
- Your NPS/CSAT will plummet to Less Than Zero if you do this a lot. If you get the customer back later, it will only because they have no better choice.
- Since the customer has churned, it has zero medium and long-term value. SaaS is about recurring revenue. Once they are lost, there is no value to them. That revenue will no longer recur. Grabbing a few nickels on the way out doesn’t matter if the customer doesn’t help you grow your ARR for next year — and the next decade. More here: The 11 Year Customer | SaaStr
- You’ll likely lose the referral foreever. No one will recommend you after this. But a customer that leaves on great terms? You’d be surprised how often they recommend you.
- It’s a lot of work, threatening your customers. It really is. It consumes a lot of energy. So it better be for a lot of money. Suing them is way too expensive. Collection agencies are more efficient, but create a lot of drama. Even having your lawyer “draft a letter” has a lot of soft and hard costs.
Don’t do this. Move on. You have bigger fish to fry.
(an updated SaaStr Classic answer)