Push for 3 year SaaS contracts

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.

For instance, MeridianLink which went public in 2021 opens with a 3 year term with auto-renew: “The initial term of our contracts is typically three years but may range from one to seven years. Our customer contracts are typically not cancellable without penalty. Our contracts almost always contain an evergreen autorenewal term that is often for a one-year extension after the initial term, but can extend the autorenewal of the contract up to the length of the original term.”

Powerschool which IPO’d in 2021 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.”

Some of our portfolio companies have also started to do the same thing. There are a few reasons:

Churn control. long term contracts help control churn. After all, if a contract isn’t coming up for renewal, it cant churn.

Customer buy-in. long term contracts result in greater customer buy-in. If a customer is committed to pay for something for 3 years, they’re going to make real effort to make the product work for them.

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.

Cache. Opening with a 3 year term says “my product is awesome, and is worth a 3 year term.” Because it is. This creates brand cache in the eye of the prospect.

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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