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? 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 … if your churn rate is low, really if your have net negative churn.
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Published on March 10, 2017