Q: Dear SaaStr: Should We Allow Refunds in a Multi-Year SaaS contract Paid Upfront?
Let me add a slightly controversial answer. If you’re still a startup, then I’d say — Maybe. If pushed. If it’s important to the deal.
But almost everyone you ask will say No. They’ll say never allow refunds in a multi-year contract:
- Sales will hate it, especially if there is an explicit or implicit clawback if they do.
- Finance will hate it because they have to deal with reserves, or a financial hit
- Customer Success will hate it because it’s a discussion they just don’t want to have
- And let’s be clear — what’s the point of giving a discount for multi-year if they can cancel? It doesn’t really make any sense.
They are right. So generally, don’t do it.
But … Before $10m, $20m ARR, maybe rethink that just a bit.
You are still a start-up. Until you are at $10m, $20m ARR … Close The Deal. And — Cash is King.
If they’ll pay you three years upfront, and you have to take some risk that you make them happy — I’ll take that risk. As should you. Stand behind your product, and yourself. And if you do — very few customers will really ever ask for a refund, even a prorated one.
And few of your large customers, the ones that will actually pre-pay for 2-3 years, will churn anyway if you do your job right.
So net, net the risk is low.
Get the Deal Closed. And if 1 or 2 customers are unhappy, and ask for some of their cash back later and aren’t using your product — it probably won’t much matter.