If you’re a SaaS business selling to enterprise, chances are good you’re selling 1 year contracts, paid up front, with auto-renewal subject to a 60 day out and automatic annual price escalators. That’s a fine, traditional contract structure in SaaS, but more and more we’re seeing companies open with longer contract terms.
Powerschool which also just IPO’d does the same thing: “Contracts are typically sold on a three-year basis with one-year rolling renewals and annual price escalators. We typically invoice our customers annually, in advance, for subscription fees and maintenance, while a portion of customers are billed semiannually, quarterly, or monthly.”
Churn control. long term contracts help control churn. After all, if a contract isn’t coming up for renewal, it cant churn.
Negotiation position. starting with 3 years allows the customer to have something to negotiate with. Let them negotiate you down to 2 years or 1 year, so they can feel like they’re getting a deal. If you’re opening with a 1 year contract though, that leaves one less lever to pull to get the deal done.
In summary, 3 years is the new 1 year. If you’re selling to an enterprise class customer ($50k+ in ACV), open with a contract structure similar to MeridianLink and Powerschool.
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