If you’re a SaaS businessselling to enterprise, chances are good you’re selling 1 year contracts, paidup front, with auto-renewal subject to a 60 day out and automatic annual priceescalators. That’s a fine, traditionalcontract structure in SaaS, but more and more we’re seeing companies open withlonger contract terms, and getting them.
For instance, MeridianLinkwhich went public in 2021 opens with a 3 year term with auto-renew: "Theinitial term of our contracts is typically three years but may range from oneto seven years. Our customer contracts are typically not cancellable withoutpenalty. Our contracts almost always contain an evergreen autorenewal term thatis often for a one-year extension after the initial term, but can extend theautorenewal of the contract up to the length of the original term."
Powerschool which IPO’d in 2021does the same thing: “Contracts are typically sold on a three-year basis withone-year rolling renewals and annual price escalators. We typically invoice ourcustomers annually, in advance, for subscription fees and maintenance, while aportion of customers are billed semiannually, quarterly, or monthly.”
Some of our portfolio companieshave also started to do the same thing. There are a few reasons:
Churn control. Long term contractshelp control churn. After all, if acontract isn’t coming up for renewal, it cant churn.
Customer buy-in. Long term contractsresult in greater customer buy-in. If acustomer is committed to pay for something for 3 years, they’re going to makereal effort to make the product work for them.
Negotiation position. Starting with 3years allows the customer to have something to negotiate with. Let them negotiate you down to 2 years or 1year, so they can feel like they’re getting a deal. If you’re opening with a 1 year contractthough, that leaves one less lever to pull to get the deal done.
Cache. Opening with a 3year term says “my product is worth a 3 year term.” Because it is. This creates brand cache in the eye of theprospect.
Enterprises want longer term. You’ll also find thatmany enterprises actually prefer longer term contracts. Once a buyer makes a decision that took significantresources and time, they don’t want to have to review that decision in 12months.
In summary, 3 years could bethe new 1 year. If you’re selling to anenterprise class customer ($50k+ in ACV), open with a contract structuresimilar to MeridianLink and Powerschool.
Thank you for your readership. Seemore blogs and SaaS data at blossomstreetventures.com. Email the author atsammy@blossomstreetventures.com.