Q: What’s the proper way to commission a multi-year SaaS sale with increasing ACV each year?
There’s no perfect answer here, but at least until you are at $10m+ ARR, my strongest recommendation is align around cash.
Later, you will align around bookings (including multi-year bookings), and change the comps plan to align around bookings.
But the sucker bet is to align around bookings anywhere < $10m-$20m in ARR, really, at any time when cash still matters.
So until $10-$20m in ARR, when cash still matters:
On one end of the spectrum:
- A multi-year deal with (x) an annual out and (y) only the first year prepaid is barely better than a standard one-year deal. It is better, but barely. It’s better because opt-out is better than opt-in. But barely.
- In many cases — a multi-year deal may actually be worse than a standard one-year deal if the incentives make an AE (x) over-discount and/or (y) risk deals and/or push too hard, too early in your company’s life, for multiyear deals. So you may not even want to incent these “barely more than one-year” deals if you don’t like the AE behavior that comes out of it.
- The key is multi-year deals need to be organic. They need to also be what the customer wants. Push too hard, too early and things break.
On the other end:
- A multi-year deal with (x) no annual outs and (y) all years cash prepaid upfront is basically all the years pre-sold. Boom! So pay up here. Pay for all the years, I say. Later, when you are Huge, the cash will matter less. But now it matters more.
- But also bear in mind you are leaving money on the table. The trade-off for 3 years cash upfront is discounting you probably won’t do later. That means more cash today (good), but less TCV. This is a good deal up until $10m-$20m, but not as good a deal after. You’d rather shoot for more total bookings.
As a rule, I say only a small incentive for multi-years without multi-cash until you are so big cash doesn’t matter.
Once you are so big and have so much cash that cash per se doesn’t matter, but bookings are your primary goal … then incent these “multi-year signed but not multi-year paid” deals more.
(note: an updated SaaStr Classic answer)