Multi-year discounts in SaaS are frequently used as just another negotiation tool. Sitting alongside closing by an earlier date and willingness to do a reference call or case study.
Therefore, all too frequently the only person who gives them a second thought is the Sales Rep calculating its impact on their commission.
But after looking at the knock-on effect of these discounts we’ve found that SaaS companies could be leaving huge amounts of revenue on the table, both in cash flow and valuation.
So, should you offer multi-year discounts or not? Well, like many things in life: it depends. But fear not, we’ve put together this summary to help you think through the fundamentals for you and your business.
Multi-Year deal definition
Let’s set some groundwork first.
When we talk about a multi-year deal it is in reference to a customer purchasing a SaaS solution for more than 12-months. In SaaS if a deal is more than 12-months it is most likely in increments of 12-months, and this is how we have approached this discussion e.g. 1 year, 2 year, 3 year, etc.
The status quo
You may not even be aware of how many of your deals from last quarter were multi-year, or how many of your customer base are currently on one, so let’s look at what it’s like at the best private SaaS companies.
Every year KeyBank works with the leading venture capital funds to have their SaaS investments complete an anonymised survey looking at their revenue across a wide array of metrics. We’ve looked at the 2019 report (pre-covid) to see what the distribution of multi-year contracts is at these high-growth, venture-backed private SaaS companies.
The key takeaway is simple:
53% had contracts that were typically 1-year in length, while 42% had more than 1 year
This validates our approach to looking at the data from the perspective of companies selling contracts in yearly increments.
The benefits of multi-year deals
Churn “reduction”
Renewal/Churn is dependent on a contract coming up for renewal, so the idea that if a customer has less chance to cancel a renewal they are less likely to leave is a simple but accurate one.
You can think of it this way: at the point of renewal your customer is ‘exposed’ to your churn rate. So reducing the number of times they are exposed increases your likelihood of keeping that customer. Therefore, longer contracts resulting in fewer points to renew (over the same time period) would lead to fewer customers leaving even if your renewal rate was identical.
But how big an impact does it have?
Based on a 90% renewal rate (at the renewal point) at the end of a 10 year period the business that offers only 2-year contracts has 26% more customers, 17% more cumulative billings collected (direct cash flow impact), and 24% greater ARR.
In SaaS, valuation is frequently based on a multiple of ARR. The company with 2-year contracts is potentially valued at nearly a quarter more due to contract length alone.
Moving from 2-year contracts to 3-year contracts is also beneficial (8% more customers, 5% greater cash flow, and 9% higher AAR), but the big jump comes from moving from 1-year to 2-year contracts.
(If you’re looking to calculate your own Churn rate, check out our blog post on how to do it here.)
Closing deals
Kahneman and Tversky in ‘Thinking Fast and Slow’ taught us about heuristics, biases, and other important research in the field of decision making, but to quickly summarise: humans are not entirely rational.
When you walk into Costco and see a 50” big screen TV down to $399 from $799 you think you’re making a $400 dollar saving if you buy it… but what if you hadn’t gone into Costco planning on buying a TV? From that perspective you actually just increased your spending by $399 from $0.
And what about those magic ‘two for one’ deals in supermarkets? The second one is free! Right…?
It’s not too different when talking about multi-year SaaS deals. There’s no doubt that multi-year deals are a valuable negotiation tool but this needs to be balanced out by what it is frequently partnered with: discounts.
Finding the balance between the two by understanding the positive and negative impacts can be found in the Implications section of this report, but we’ll get to that.
Competitor lock out
Some would argue this is a component of renewals/churn but it’s important enough to warrant its own section.
When a customer doesn’t renew with you they may not replace your offering in their tech stack, or they may swap you out for a direct competitor.
There are several different situations in which a long-term contract can be beneficial, we’ve outlined two common reasons below:
Protectionist
Stop others entering your market
You have the first mover advantage but know there are others looking to launch soon. By locking down these early adopter customers you are reducing your competitors' initial addressable market. This in turn limits their potential ARR.
Expansionist
Build on your early success to monopolize the market
Logos may be becoming more important for your business. You’ve tapped out the early adopters or industries and are now looking at what you can expand into. If you can find and lock down a few leading logos in a new space and build a marketing campaign around them you could sweep the industry fast.
If however you loudly tell the industry that one of their members is now your customer, run a campaign, include them in all your decks and on your homepage...only for them to leave you a year later for a competitor, then your entire expansion in that vertical could be in jeopardy.
Cashflow
This is rarely considered, and very rarely acted upon, as highlighted in the KeyBanc report referenced earlier where only 2% of respondents said that this is something they did, but when offering a multi-year deal you can ask for the entire payment upfront.
This brings forward future cash flow to the present day and allows you to use that cash to make the investments necessary to grow your business.
Something to consider.
Negatives of multi-year deals
Loss of revenue
Saas businesses when considering the potential loss of revenue of a multi-year deal often only consider the impact on Year 1 ARR if there is a discount applied. There’s no thought about the impact beyond that year.
But a multi-year deal has longer lasting implications that need to be considered in terms of revenue impact, regardless of whether there is a discount or not.
Firstly, you’re giving up the ability to increase prices with inflation year on year. This could be a small percentage, but as your business grows could add up to a significant dollar figure.
Secondly, you are giving up the right to get a customer aligned with your list pricing every 12 months, and in turn increasing the gap between their expectation of cost and the reality of cost.
While it’s fine in the short term as they are exposed to fewer renewal events, this then compounds the problem because after several years they are informed that after being a loyal customer for x years, and giving you their vote of confidence by signing a multi-year deal before, the cost is now going up 20-30%.
You’ve also likely massively improved the product over the years, but getting a customer to take a 21% jump compared to two 10% jumps over 2 years means that unless you’ve been communicating both the value you’re delivering and the regularly updating list pricing it will be an uphill battle. One that will likely result in you having to give a discount on list price at renewal even if they only renew for one year.
In summary, you anchor this customer to the initial price they pay much more heavily on a multi-year customer. So that initial multi-year contract eats into future ARR and creates more work for the Customer Success team down the road.
Potential expansion limitation & reduced customer experience
This depends on how much your Customer Success team is firefighting vs. being proactive. We’ve included it because no matter how proactive your Customer Success team wants to be they will undoubtedly have to trade some level of proactivity for firefighting.
When a Customer Success Manager needs to respond to two identical companies, one expiring in 3-months and the other expiring in 15-months, they are likely to prioritise the company who is close to renewal.
This can lead to two issues due to the knock-on effect of reduced attention on the longer-term customers.
Firstly, it’s possible you’ll miss potential expansion opportunities. The less time you spend with a customer, and the less you look at their data, the less chance there is of identifying further ways you can help them.
Secondly, consider the fact you are potentially setting up your customers who have shown you the most faith and offered you the most revenue (over the length of the entire contract) less attention than a 1-year contract customer, and in turn a potentially worse customer experience. Obviously this is not something you would set out to do, but it is a real repercussion of multi-year deals.
It’s important to clarify the above is certainly not a reason to not do multi-year deals. If your Customer Success team is so stretched that the above occurs regularly then multi-year deals, or the lack thereof, will not be the cause of your downfall.
We’ve raised it because our focus is on giving you a complete understanding of the risks and benefits of multi-year deals so that you can pick what is right for your business, and then build the right systems in place to support them.
Having now considered all of the benefits and negatives of multi-year deals we can bring them together.
Implications
Your guide
Summary
Reading this is probably the longest you’ve spent thinking about multi-year deals. With these new insights you can take a step back, determine what the right approach is for your company, and go drive alignment along that vision inside and outside of your business.
Once you’ve signed that customer, Planhat is here to help you connect all your customer data, get actionable insights and drive customer experience. Planhat brings all the insights and tools you need to manage renewals, reduce churn, and boost expansion.
Want to discuss this further? Reach out - we’d love to discuss this and hear your thoughts.
Senior Account Executive
Forecastable
Christian is a customer success and revenue leader with a flair for community-led growth. He currently serves as Senior Account Executive at Forecastable and Go-To-Network Evangelist at Commsor, helping companies drive revenue through trusted networks over traditional outreach. Previously, he spent nearly three years at Planhat, where he earned Top 25 CS Thought Leader recognition and played a key role in product-led research and GTM. Christian began his career at Tessian, rising from CSE to Customer Operations Manager while leading major U.S. accounts and building internal CS tooling. He brings a unique blend of operational depth, storytelling, and strategic thinking.
